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(a) Give two assumptions
of the Economic Order Quantity (EOQ) model. [2]
(a) Any two from:
- Known constant stock holding cost
- Known constant ordering cost
- Known rates of demand
- Known constant price per unit
- Instantaneous replenishment
- No stockouts allowed [2]
(b) High Spirit Ltd. is
retailer of beer barrels. The company has an annual demand
of 30,000 barrels. Fresh supplies can be obtained immediately. Ordering
and
transport costs amount to $200 per order. The annual carrying cost
of holding
one barrel in stock is estimated to be $12.
(i) Calculate the Economic Order Quantity (EOQ). [3]
(ii) Using the EOQ calculated in part (i) calculate the annual ordering
costs. [2]
(iii) Using the EOQ calculated in part (i) calculate the annual stockholding
costs. [2]
(iv) Using the EOQ calculated in part (i) calculate the total inventory
costs. [1]
(v) Another supplier does not charge order costs. However, this supplier
only delivers orders of size 5,000 beer barrels. The supplies will
now
not be delivered instantly and so High Spirit Ltd. will have to keep
a
safety stock of 5,000 barrels. Would it be more economical for High
Spirit Ltd. to use this supplier? [5]
(b) (i) Demand, D = 30,000 barrels per year
Carrying cost, Cc = $12 per barrel per annum
Ordering cost, Co = $200
Economic order quality, EOQ =
= 1000 barrels. [3]
(ii) Number of orders per year = 30,000/1,000 = 30.
Annual ordering costs = 30 × $200 = $6,000 [2]
(b) (iii) Annual stockholding costs =(Average stock/2) X stockholding
cost=(1000/2) × 12=$6,000 [2]
(iv) Total inventory costs = Annual ordering costs + Annual stockholding
costs = $12,000. [1]
(v) This time, ordering costs=0. [1]
Annual stockholding costs = (Average stock/2) × stockholding
cost
= (5,000+5,000/2) × $12
= $90,000 [2]
Total inventory costs are now $90,000, and so it is not more economical
for
High Spirit Ltd. to use this supplier. [2]
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