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Litespeed Products buys 200 000 motors per year from a supplier that can fulfil orders within two days of receiving them
Litespeed Products buys 200 000 motors per year from a supplier that can fulfil orders within two days of receiving them. Litespeed transmits its orders to this supplier electronically, so the lead time to receive orders is two days. Litespeed's order cost is about N$295 per order and its carrying cost is about N$37 per motor per year. The firm maintains a safety stock of motors equal to six days of usage. Assume a 365- day year.
Required:
2.1What is the firm's economic order quantity for the motors?
2.2Whal is its total cost at the EOQ?
Expert Solution
EOQ= √(2*Ordering cost/order*Annual usage)/Carrying cost of one unit for one year
2.1.)
Given ;
Ordering cost =$295 per order
Carrying cost = $37 per item per year
Annual usage =200,000 per year
Put the value in the formula;
EOQ= √(2*295*200,000)/37
=√3,189,189.18
=1785.83 or 1786
2.2)
Total orders= 200,000/1786
=112
Ordering cost =112* 295
=$33,040
Inventory carrying cost for average stock =1786/ 2* 37
=$33,041
So,
Total cost at EOQ = $33,040+$33,041
=$66,081
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