Problem - EOQ and re-order point
Kyru Inc. is a retailer that sells game consoles, electronic games, and accessories. It purchases the electronic games from Sotell for $30 each. Kyru expects to sell 18,750 electronic games this year. Competition for electronic games is strong, and it is critical that Kyru has sufficient stock to meet demand.
Kyru gathered the following information regarding last year's costs and activities.
|
Activity
|
Description of activity
|
Total costs
|
Cost allocation base
|
|
Ordering
|
Placing orders for purchases
|
$176,000
|
Number of orders
|
|
Shelf stocking
|
Stocking and restocking merchandise
|
$105,000
|
Hours stocking
|
|
Other
|
Facility sustaining
|
$16,500
|
(Not allocated)
|
|
Total
|
$297,500
|
|
In addition to purchasing electronic games from Sotell, Kyru purchases game consoles from Bitbyte and accessories from Petersen. There were 8,000 orders placed last year - 2,000 with Sotell, 1,500 with Bitbyte, and 4,500 with Petersen.
Stocking and restocking hours have been directly traced to product lines. Of the 14,000 hours spent in this activity, 60% was for accessories, 25% for electronic games, and 15% for game consoles. Kyru stocked 17,500 electronic game units last year.
The other relevant carrying costs for items such as insurance and breakage for electronic games is $0.60 per unit. Kyru uses a required rate of return of 8%. The lead time is three days. Kyru can place rush orders, but this adds $3.00 to the cost of each unit. This is the only quantifiable stockout cost.
Assume 30 days per month and 360 days per year.
Required -
a. Calculate the relevant ordering costs per purchase order and the relevant carrying costs per game.
b. Calculate the economic order quantity (EOQ) for the electronic games and determine the number of orders that will be placed in the coming year. (Ordering costs and carrying costs should be based on last year's figures.)
c. Using the EOQ and total relevant costs, calculate the total ordering and carrying costs for the period.
d. Assuming demand is uniform throughout the period, what should the re-order point be?