Considering cost of inventory holding-cost of ordering

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Reference no: EM132266289

Smith Industries purchases a subcomponent critical for its most popular product from another manufacturer. The annual demand for the subcomponent is 5,000 units. The holding cost is assessed at 20% of the price of the subcomponent. The manufacturer of the subcomponent charges Smith $30 for each unit if Smith orders less than 200 units and $28 for each unit if Smith orders 200 units or more. Smith’s cost to place an order is $20. Round off your responses to the nearest unit, number of orders, etc.

a) What is the optimal order quantity for this subcomponent if the EOQ model is used?

b) What is the total of annual relevant costs of Smith Industries (considering the cost of inventory holding and cost of ordering)?

c) If the EOQ model is used, what is the optimal number of orders to be placed in a year?

d) If the manufacturer’s lead time is 1 week and Smith operates 50 weeks a year, what is the reorder point for the product?

e) What is your interpretation of the reorder point you calculated in part (d)?

Reference no: EM132266289

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