Activities/Assessments

Activity 12

1. Each year, Y Company purchases 20,000 units of an item that costs P 640 per unit.
The cost of placing an order is P 480, and the cost to hold the item in inventory for
one year is P 150.

a. Determine the EOQ.

= 2 (20,000) (480)
150
19,200,000
=
150
= 357.77

b. What is the average inventory level, assuming that the minimum inventory level
is zero?

EOQ 357.77
Divided by: 2
Average inventory level 178.89

c. Determine the total annual ordering cost and the total annual holding cost for
the item if the EOQ is used.

Demand 20,000
Multiply by: Ordering cost 480
Divided by: EOQ 357.77
Total annual ordering cost 26,832.88

EOQ 357.77
Multiply by: Holding cost 150
Divided by: 2
Total annual holding cost 26,832.75

TIC = TOC + THC

TIC = 53,665.63
2. A toy manufacturer uses approximately 32,000 silicon chips annually. The chips are
used at a steady rate during the 240 days the plant operates. Annual holding cost is
P27 per chip and ordering cost is P1,080. Lead time = 1 week

a. Find the EOQ

= 2 (32,000) (1,080)
27
69,120,000
=
27
= 1,600 chips

b. Find the reorder point

32,000
R= (7 days)
240
= 933.33 units

c. What would be your ordering policy for this item?

A total of 1,600 chips should be placed an order for 20 times in 12 days

Economic order quantity 1,600

Divided by: Daily demand
(32,000/240) 133.33
Average time between orders 12

Number of orders (32,000/1,600) 20

d. Find the total annual cost of ordering and carrying silicon chips.
D
Annual ordering cost = xS
Q

32,000
= x 1,080
1,600
= 21,600

Q
Average holding cost = xH
2
= 1,600
x 27
2
= 21,600

32,000 1,600
TC = 1,080 + 27
1,600 2

= 43,200
3. A large bakery buys sugar in 50-kg bags. The bakery uses an average of 1,344 bags
a year. Preparing an order and receiving a shipment of sugar involves a cost of P 135.
Annual carrying costs are P 630 per bag. The bakery operates 280 days per year.
Lead time = 2 weeks.

a. Determine the economic order quantity.

= 2 (1,344) (135)
630
= 362,880
630
= 24 bags

b. What is the average number of bags on hand?

EOQ 24
Divided by: 2
Avergae number of bags on hand 12

c. When should the bakery order for more sugar?

1,344
R= (14 days)
280
= 67.20 bags

d. How many times per year will the bakery order for sugar?
Annual demand of bags 1,344
Divided by: EOQ 24
Total 56