Quarter-inch stainless-steel bolts are consumed in a factory at a fairly steady rate of 60 per week. The bolts cost the plant two cents each. It costs the plant $12 to initiate an order, and holding costs are based on an annual interest rate of 25 percent.
(a) Determine the optimal number of bolts (i.e., optimal lot size) for the plant to purchase and the time between placement of orders?
(b) What is the yearly holding and setup cost for this item?
(c) Now, Suppose that although we estimated demand to be 60 per week, it turns out that it is actually 120 per week (i.e., we had a forecasting error of 100%)
If we use the lot size calculated in the previous problem (i.e., assuming the erroneous demand estimate), what will the setup plus holding cost be under the true demand rate?
What would be the cost if we had used the optimum lot size for the true demand rate?
(d) What percentage increase in cost was caused by our demand forecasting error? What does this tell you about the sensitivity of the EOQ model to errors in the data?