Question: Your firm creates specialty home thermostats and sells them to home improvement stores. The thermostats are made up of three major components: a display (and control), a computer (and WiFi), and back (and battery). Each thermostat requires one of each of the parts. The number of units produced averages 26000/year and has been fairly consistent over the past few years.
Each component is ordered from a vendor located in central New York. The cost per unit is $60 per display, $55 per computer and $16 per back. Accounting has determined the cost of ordering (the phone call) and handling the invoice for the batch is about $40, $55 and $60 for orders from each vendor, respectively. Its estimate of the holding cost for parts is 24% of the cost of the parts annually.
For each order, a delivery truck is sent out to the appropriate vendor â a 50 minute drive (each way) to any vendor. Once at the vendor, it takes 20 minutes to coordinate with the vendor to get the truck loaded. A truck and driver costs $50/hr and is billed back to your department. Currently, you order each component separately based on their EOQ values, but since they are located so closely to each other, you are considering combining orders.
SHOW YOUR FORMULAS FOR ALL CALCULATIONS
a) What are the current (Economic Ordering Quantity) order quantities for each component? Round your answers to the nearest integer.
b) It only takes 10 minutes to get from one vendor to another and you want to take advantage of this closeness. You want to place an order with all vendors at the same time and pick them up in one trip. What would be the (EOQ) order quantities for each component in this case?
c) What is the change in the total annual holding and setup costs?