A computer company that operates 250 days a year has an annual demand of 20,000. They want to determine EOQ for circuit boards which have an annual holding cost of $10/unit, and an ordering cost of $75. The purchasing lead time is 5 days. What is the reorder point (ROP) and Total Cost (TC)?
A computer company that operates 250 days a year has an annual demand of 20,000. They want to determine EOQ for circuit boards which have an annual holding cost of $10/unit, and an ordering cost of $75. The purchasing lead time is 5 days. What is the reorder point (ROP) and Total Cost (TC)?
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
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![### Understanding Economic Order Quantity and Reorder Point
A computer company that operates 250 days a year has an annual demand of 20,000 units for circuit boards. They are seeking to determine the Economic Order Quantity (EOQ), with the following additional information:
- **Annual Holding Cost:** $10 per unit
- **Ordering Cost:** $75 per order
- **Purchasing Lead Time:** 5 days
**Objective:**
Calculate the Reorder Point (ROP) and Total Cost (TC).
**Options:**
- **Option 1:** 400 units, $5,477
- **Option 2:** 300 units, $3,000
- **Option 3:** 400 units, $5,350
- **Option 4:** 200 units, $2,000
- **Option 5:** 350 units, $5,277
### Explanation of the Concepts:
- **Economic Order Quantity (EOQ):** A calculation used to determine the optimal order quantity that minimizes the total inventory cost, including ordering and holding costs.
- **Reorder Point (ROP):** The inventory level at which a new order should be placed to avoid stockouts, taking the lead time into account.
### Steps for Calculation:
1. **EOQ Formula:**
\[
EOQ = \sqrt{\left(\frac{2 \times \text{Demand} \times \text{Ordering Cost}}{\text{Holding Cost}}\right)}
\]
2. **Reorder Point Calculation:**
\[
ROP = \text{Daily Demand} \times \text{Lead Time}
\]
- Daily Demand = \(\frac{\text{Annual Demand}}{\text{Operating Days}}\)
3. **Total Cost (TC):**
\[
TC = \left(\frac{\text{Demand} \times \text{Ordering Cost}}{EOQ}\right) + \left(\frac{EOQ \times \text{Holding Cost}}{2}\right)
\]
These calculations help the company maintain an efficient inventory system, reducing costs and ensuring adequate supply.
### Note:
Given options suggest varying units for EOQ, and the accompanying total costs. Select the correct pairing based on computed EOQ and ROP values.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F537cca7c-787a-475d-9aba-926e9a602de3%2F1a14be5f-d3b2-48cf-b59f-6d73c6ee35ae%2F7s8p4ht_processed.jpeg&w=3840&q=75)
Transcribed Image Text:### Understanding Economic Order Quantity and Reorder Point
A computer company that operates 250 days a year has an annual demand of 20,000 units for circuit boards. They are seeking to determine the Economic Order Quantity (EOQ), with the following additional information:
- **Annual Holding Cost:** $10 per unit
- **Ordering Cost:** $75 per order
- **Purchasing Lead Time:** 5 days
**Objective:**
Calculate the Reorder Point (ROP) and Total Cost (TC).
**Options:**
- **Option 1:** 400 units, $5,477
- **Option 2:** 300 units, $3,000
- **Option 3:** 400 units, $5,350
- **Option 4:** 200 units, $2,000
- **Option 5:** 350 units, $5,277
### Explanation of the Concepts:
- **Economic Order Quantity (EOQ):** A calculation used to determine the optimal order quantity that minimizes the total inventory cost, including ordering and holding costs.
- **Reorder Point (ROP):** The inventory level at which a new order should be placed to avoid stockouts, taking the lead time into account.
### Steps for Calculation:
1. **EOQ Formula:**
\[
EOQ = \sqrt{\left(\frac{2 \times \text{Demand} \times \text{Ordering Cost}}{\text{Holding Cost}}\right)}
\]
2. **Reorder Point Calculation:**
\[
ROP = \text{Daily Demand} \times \text{Lead Time}
\]
- Daily Demand = \(\frac{\text{Annual Demand}}{\text{Operating Days}}\)
3. **Total Cost (TC):**
\[
TC = \left(\frac{\text{Demand} \times \text{Ordering Cost}}{EOQ}\right) + \left(\frac{EOQ \times \text{Holding Cost}}{2}\right)
\]
These calculations help the company maintain an efficient inventory system, reducing costs and ensuring adequate supply.
### Note:
Given options suggest varying units for EOQ, and the accompanying total costs. Select the correct pairing based on computed EOQ and ROP values.
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