Economic order quantity: This is what happens at your firm that operates 7days/wk, 52 wks/yr.
Your firm uses an average of 2,200 doohickeys every week.
The doohickey vendor has signed a contract for the year, doohickey prices are fixed at $16.00.
The finance manager has sent out a memo stating that recent market conditions have made the firm’s cost of capital 30% per year.
The accounting department has sent out a memo stating that warehouse operations cost $15.00/sqft per year. Five doohickeys take up 10 sq ft of warehouse space.
The risk manager has sent out a memo stating that the firm loses 15% per year on inventory due to shrinkage and obsolescence.
The Quality Department has sent out a memo stating that each order placed requires an inspector to review the documents and incoming items that takes an average of one hour; the average cost to the firm of the QA inspector is $180/hr.
The Purchasing Department has revised the average manhours required to process an order. It now takes a buyer 20 min to process an order and the buyer costs the firm $90/hr.
A) What is the holding cost for one doohickey for one year?
B) What is the cost to place one order based on the items in 1)a?
C) Make an Exceltm spreadsheet table that has a column showing the annual cost for each of the items in 1)a based on ordering quantities of 1,000, 1,200, 1,400, 1,600, 1,800, 2,000, 2,200, 2,400 at a time. The different order quantities should be in separate rows. Make sure there is a column showing total annual holding costs and another column showing total annual ordering costs for each order quantity.
D) Indicate the Economic Order Quantity by highlighting the row with the quantity closest to the EOQ, based on the sum of the quantity annual holding and ordering cost.
E) Calculate the Economic Order Quantity directly using the appropriate equation in the lecture.