Compare holding and ordering costs at optimal order size

Assignment Help Operation Management

Reference no: EM132276704

JTC Company buys 7,905 units of an item every year with a unit cost of $10. It costs $31 to process an order and arrange delivery, while interest and storage costs amount to $4 a year for each unit held. What is the best ordering policy for the item?

In order to answer the above question, follow the steps below:

a) For each hypothetical order size Q = 50, 100, 150, …, 800 calculate:

1. Annual Purchase Cost using formula ????????

2. Annual Ordering Cost using formula ???????? ????

3. Annual Holding Cost using formula ????h 2

4. Total Relevant Cost (TRC) using formula ???????? ???? + ????h 2

5. Total Annual Cost (TC) using formula ???????? + ???????? ???? + ????h 2

b) Plot the annual order cost, annual holding cost, and TRC with respect to order sizes in a.

c) Find the Economic Order Quantity by identifying the Q that leads to the lowest TRC.

d) Identify the EOQ on your chart.

e) Compare the holding and ordering costs at the optimal order size (EOQ).

Example of step (a): Let suppose Q = 50, then - Annual Purchase Cost: ???????? = 7,905 × 10 = $79,050

- Annual Ordering Cost: ????????/???? = 7,905 × 31/50 = $4,901

- Annual Holding Cost: ????h/2 = 50 × 4/2 = $100

- Total Relevant Cost (TRC): ???????? ???? + ????h 2 = $4,901 + $100 = $5,001

- Total Annual Cost (TC): ???????? + ???????? ???? + ????h 2 = $79,050 + $5,001 = $84,051

Reference no: EM132276704

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