Economic Order Quantity (EOQ): Economic order quantity is the quantity of order that is purchased from supplier at a time, the EOQ aim is to reduce the carrying and ordering cost of inventory. EOQ is also referred as the optimum level of lot size. Safety Stock: Safety stock is that type of stock which a company always store to meet the uncertainties seen in the future. The company always maintains this type of stock so that the demand of customer will be fulfilled and company will retain the customer. To calculate: The optimum number of motors per order using EOQ model.

Question

Phillips Corporation is a major manufacturer of food processors. It purchases motors from Viking Corporation. Annual demand is 52,000 motors per year or 1,000 motors per week. The ordering cost is $360 per order. The annual carrying cost is $6.50 per motor. It currently takes 2 weeks to supply an order to the assembly plant. Q. What is the optimal number of motors that Phillips’s managers should order according to the EOQ model?

Answer 1

Question

Chapter 20, Problem 20.31P

1.

To determine

Economic Order Quantity (EOQ):

Economic order quantity is the quantity of order that is purchased from supplier at a time, the EOQ aim is to reduce the carrying and ordering cost of inventory. EOQ is also referred as the optimum level of lot size.

Safety Stock:

Safety stock is that type of stock which a company always store to meet the uncertainties seen in the future. The company always maintains this type of stock so that the demand of customer will be fulfilled and company will retain the customer.

To calculate: The optimum number of motors per order using EOQ model.

2.

To determine

To compute: The reorder point

3.

To determine

To compute: The safety stock also explains the effect of safety stock on reorder point and on reorder quantity.

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Phillips Corporation is a major manufacturer of food processors. It purchases motors from Viking Corporation. Annual demand is 52,000 motors per year or 1,000 motors per week. The ordering cost is $360 per order. The annual carrying cost is $6.50 per motor. It currently takes 2 weeks to supply an order to the assembly plant. Q. What is the optimal number of motors that Phillips’s managers should order according to the EOQ model?

The annual demand for a particular chemical product is 1,200 units. Suppose that the annualholding cost is $24 per unit, and the ordering cost is $100.Part A: Find the optimal order quantity based on EOQ analysis, and calculate the combinedannual ordering and holding cost.Part B: Now suppose that the store manager finds out that the demand has been underestimated.Specifically, the correct annual demand is 1,500 units. On the other hand, due to operationalrestrictions she cannot change the order quantity and thus use the same order size from part A.How much this error cost the store? (This can also be considered as a penalty for parametermisestimation).

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