Part (A): A local tire distributor for expects to sell 9,600 steel-belted tires of a certain size and tread design next year. Assume that EOQ model assumptions are valid. Each tire costs $50, ordering cost is $80 per order and carrying cost is 15 dollars per unit per year. Assume that the distributor operates 300 days a year. (i) What is the annual inventory cost if you order 600 units at a time? (ii)Draw the graph of annual cost for holding, ordering and holding+ ordering (for lot size between 80 and 640 in the increment of 80). (iii) Determine the “optimal” lot size if your order lot size must be a multiple of 60. For this answer, what is your order policy, that is, (when to order, how much to order); if a delivery lead-time is 20 days? When you are placing an order, how much on hand inventory would you have?
Part (B): For a product satisfying EOQ model, the planning department estimates values of D, S, and H to be 2400 units per year, $150 and $2 per unit per year respectively. (i) Calculate the lot size on the basis of estimated values. What will be annual inventory cost based on your estimates of D, S and H? (ii) Suppose the true values of D, S and H are 3000 units per year, $125 and $3 per unit per year. Calculate the lot size on the basis of true values. What will be annual inventory cost? (iii) Suppose you did not know the true values and decided to use the lot size (order quantity) found in part (i). Calculate the annual cost using this lot size but now use true cost parameters.