Question

Demand for a certain radial tires at a tire company is 800 units per month. Each tire costs the company $80. Ordering costs are $75, and the annual carrying cost for each tire is $16. That is,
D = 800 * 12 = 9600 /yr
S = $75 /order
P = $80
H = $16 /unit / yr

1. How many tires should the manager order in each lot?

2. What is the company's average inventory of this tire, if the EOQ quantity is ordered?

3. How many times per year will an order be placed, if EOQ quantity is ordered?

4. How often will an order be placed (length of order cycle), if EOQ quantity is ordered?

5. How much does the company spend annually on fixed ordering costs, if EOQ quantity is ordered?

6. How much does the company spend annually on holding (carrying) costs, if EOQ quantity is ordered?

Answer 1

Answer:

1. 300 tires

2. 150 units

3. 32 times

4. 11.4 days

5. $2,400

6. $2,400

Explanation:

Economic order quantity is the quantity at which business incur minimum cost. This is the level of order where the holding cost equals to the ordering cost of the business.

Material cost remains the same whatever the the order level. The costs that vary with the change in order level are ordering cost and holding cost.

The cost incurred to for each order placed is called ordering cost and cost which incurred to hold the inventory for a specific period is called holding cost.  

EOQ =  $\sqrt{\frac{2 X S X D}{H} }$

EOQ = $\sqrt{\frac{2 X 75 X 9600}{16} }$

EOQ = 300 units

1. EOQ is the level of order That should be placed to minimize the total cost of the business. The manager should order 300 tires in each lot.

2.

Average Inventory = EOQ / 2 = 300 / 2 = 150 units

3.

Number of orders = Total yearly demand / EOQ = 9,600 / 300 = 32 times

4.

Number of days = ( EOQ / total demand ) x 365 = 300 / 9600 x 365 = 11.4 days

5.

Fixed ordering cost = Total Demand / EOQ  x $75 = (9600 / 300) x $75 = $2,400

6.

Holding cost = Average Inventory x holding cost per unit = 150 units x $16 = $2,400

Here Holding cost and ordering cost is same at EOQ level.