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Activity 12: Activities/Assessments

The document provides examples of solving economic order quantity (EOQ) models for three different companies. It calculates the EOQ, average inventory level, total annual ordering and holding costs, reorder point, and number of orders per year for each company based on given annual demand, ordering costs, holding costs, and other relevant information. Formulas for EOQ, average inventory, total annual costs, reorder point, and number of orders are provided. Solutions are shown step-by-step for determining the optimal ordering quantities and policies.

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Joshua Lokino
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96 views3 pages

Activity 12: Activities/Assessments

The document provides examples of solving economic order quantity (EOQ) models for three different companies. It calculates the EOQ, average inventory level, total annual ordering and holding costs, reorder point, and number of orders per year for each company based on given annual demand, ordering costs, holding costs, and other relevant information. Formulas for EOQ, average inventory, total annual costs, reorder point, and number of orders are provided. Solutions are shown step-by-step for determining the optimal ordering quantities and policies.

Uploaded by

Joshua Lokino
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Activities/Assessments:

Activity 12

Solve the following EOQ model problems:

1. Each year, Y Company purchases 20,000 units of an item that costs P 640 per unit. The cost of
placing an order is P 480, and the cost to hold the item in inventory for one year is P 150.

a) Determine the EOQ.

EOQ = √2*A*S/H
EOQ = √2*20000*480/150
EOQ = 357.77 units

b) What is the average inventory level, assuming that the minimum inventory level is zero?

Average Annual Inventory = EOQ/2


= 357.77/7
= 178.89 units

c) Determine the total annual ordering cost and the total annual holding cost for the item if the EOQ is
used.

TOC = D/Q*S
THC = Q/2H
= 20,000/357.77*480 = 357.77/2*150
= P 26,832.88 = 26,832.75

(TIC) = 53,665.63

2. A toy manufacturer uses approximately 32,000 silicon chips annually. The chips are used at a steady
rate during the 240 days the plant operates. Annual holding cost is P27 per chip and ordering cost is
P1,080. Lead time = 1 week.

a) Find the EOQ.

Annual Demand (A) = 32,000 chips


Ordering Cost (S) = P 1,080/order
Annual Holding Cost (H) = P 27/chip year
Number of Operating Days = 240
Economic Order Quantity = √2*A*S/H
EOQ = √2*32,000*1,080/27
EOQ = 1,600 chips

b) Find the reorder point.

Lead Time (L) = 1 weeks = 7 days


Reorder Point = Lead Time * Daily Demand
ROP = 7 * (32,000/240)
ROP = 933.333

c) What would be your ordering policy for this item? The average time between orders (T) = (Order
Quantity/Daily Demand)

Q = EOQ = 1,600
T = (1,600/32,000/240)
T = 12 days

Number of Orders (N) = (Annual Demand/Order Quantity)


For Q= EOQ= 1,600
N = (32,000/1,600)
N = 20 orders

Ordering policy is to order 1,600 chips 20 time in every 12 days each order.

d) Find the total annual cost of ordering and carrying silicon chips.

Annual ordering cost (AOC) = Number of orders * Ordering cost per order
AOC = N*S = 20 *1,080 = P 21,600

Annual holding cost = Annual carrying cost = Average Inventory * Holding Cost = AI*H
Average Inventory = (Order Quantity/2) = (Q/2)
Q=EOQ=1,600
AHC= (Q/2)*H = (1,600/2)*27= P 21,600

At EOQ, Annual Holding Cost = Annual Order Cost


Total Annual Cost of Ordering and carrying silicon chips =Total annual inventory cost,
Total annual inventory cost (TIC) = Annual Ordering cost + Annual Holding cost
Total inventory cost (TIC) = 21,600+21,600
(TIC) = P43,200

3. A large bakery buys sugar in 50-kg bags. The bakery uses an average of 1,344 bags a year. Preparing
an order and receiving a shipment of sugar involves a cost of P 135. Annual carrying costs are P 630
per bag. The bakery operates 280 days per year. Lead time = 2 weeks.

a) Determine the economic order quantity.

Annual Demand (A) = 1,344 bags


Ordering Cost (S) = P 135
Annual Carrying cost = P 630 per bag
EOQ = √2*1344*135/630
EOQ = 24

b) What is the average number of bags on hand?

Average Number of Bags = Average Inventory


AI = Ordering Quantity / 2 = Q/2
Q=EOQ=24
AI = (24/2)
= 12 bags

c) When should the bakery order for more sugar? When should the bakery order for more orders = the
average time between order (T)

T = (Order Quantity/Daily Demand) = Q/d


T = (24/1344/280)
T = 5 days

ROP = 1344/ 280*14 days


ROP = 67.2

The bakery should order for 24 bags of sugar whenever its inventory level drop drops to 67.2 bags.

d) How many times per year will the bakery order for sugar?

Number of order per year = A/Q


N = (1,344/24)
N = 56 orders

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