MGT 2070 Assignment #8 Answers

12.9 George Heinrich uses 1,500 per year of a certain subassembly that has an annual
holding cost of $45 per unit. Each order placed costs George $150. He operates 300 days per
year and has found that an order must be placed with his supplier 6 working days before he can
expect to receive the order. For this subassembly, find
a) Economic order quantity
Q

2 DS

2 1,500 150
100 units
45

b) Annual holding cost

Holding cost

QH 100 45

$2,250.00
2
2

c) Annual ordering cost

DS

Order cost Q

1500 150
$2,250.00
100

d) Reorder point
Reorder point = demand during lead time

1,500
units day 6 days 30 units
300

12.23 Larry LaForge Products offers the following discount schedule for its 4-by-8-foot sheets
of quality plywood.
Order
9 sheets or less
10 to 50 sheets
More than 50 sheets

Unit Cost
$18.00
$17.50
$17.25

Home Sweet Home Company orders plywood from LaForge. Home Sweet Home has an ordering
cost of $45. Carrying cost is 20%, and annual demand is 100 sheets. What do you recommend?
(a)

Economic Order Quantity:

Q

2 DS
H

where: D = period demand, S = setup or order cost, H = holding cost, P price/unit

Order quantity 9 sheets or less, unit price = $18.00
Q

2 100 45
50 units
0.20 18

Total cost order cost holding cost purchase cost

DS QH
100 45 50 0.20 18

PD

18 100
Q
2
50
2
90 90 1,800 $1,980 see note at end of problem re. actual price

(b)

Order quantity 10 to 50 sheets: unit price = $17.50

Q

2 100 45
50.7 units or 51 units
0.20 17.50

Total cost order cost holding cost purchase cost

DS QH
100 45 51 0.20 17.50

PD

17.50 100
Q
2
51
2
88.23 89.25 1750.00 1927.48

(c)

Order quantity more than 50 sheets: unit price = $17.25

Q

2 100 45
511
. units or 51 units
0.20 17.25

Total cost order cost holding cost purchase cost

DS QH
100 45 51 0.20 17.25

PD

17.25 100
Q
2
51
2

88.24 87.98 1,725.00 $1,90122

.
Therefore, order 51 units.
Note: Order and carrying costs are not equal due to rounding of the EOQ to a whole number.

13.3 The president of Daves Enterprises, Carla Daves, projects the firms aggregate demand
requirements over the next eight months as follows:
Jan
Feb
Mar
Apr

1,400
1,600
1,800
1,800

May
June
July
Aug

2,200
2,200
1,800
1,400

Her operations manager is considering a new plan, which begins in January with 200 units on
hand and ends with zero inventory. Stockout costs of lost sales is $100 per unit. Inventory
holding cost is $20 per unit per month. Ignore any idle-time costs. The plan is called plan A.
Plan A. Vary the workforce level to execute a chase strategy by producing the quantity
demanded in the prior month. The December demand and rate of production are both 1,600
units per month. The cost of hiring additional workers is $5,000 per 100 units. The cost of laying
off workers is $7,500 per 100 units. Evaluate this plan.

Month
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug

Demand
1400
1600
1800
1800
2200
2200
1800
1400

Production
1600
1200
1600
1800
1800
2200
2200
1800
1400

Hire

Fire

Cost

400

$30,000
$20,000
$10,000
$0
$20,000
$0
$30,000
$30,000
$140,000

400
200
400
400
400

Total cost for the plan is $140,000. Note that we do not attempt to include the costs of production
we assume that production costs are the same between all three plans and can therefore be
cancelled out in any comparison. Also note that in January, we must incur the firing cost to move
from a production level of 1600 to one of 1200.
13.4 Using the information in problem 13.3, develop plan B. Produce at a constant rate of
1,400 units per month, which will meet minimum demands. Then use subcontracting, with
additional units at a premium price of $75 per unit. Evaluate this plan by computing the costs for
January through August.
Month
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug

Demand

Production

1400
1600
1800
1800
2200
2200
1800
1400

1400
1400
1400
1400
1400
1400
1400
1400

Ending Inv.
200
200
0
0
0
0
0
0
0

Subcontract

Cost

400
400
800
800
400

$4,000
$0
$30,000
$30,000
$60,000
$60,000
$30,000
$0
$214,000

Total cost for the plan is $214,000. Note that the cost for January is to carry over the 200 extra
units in inventory for a month. In February, the inventory is used up.
13.5 Daves is now considering plan C. Beginning inventory, stockout costs, and holding costs
are provided in Problem 13.3.
a)
Plan C. Keep a stable workforce by maintaining a constant production rate equal to the
average requirements and allow varying inventory levels.
The average requirement is found by summing the total demand from January through August,
and dividing the result by 8 months to find 1,775 units per month.

Month
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug

Demand

Production

1400
1600
1800
1800
2200
2200
1800
1400

1775
1775
1775
1775
1775
1775
1775
1775

Ending Inv.
200
575
750
725
700
275
0
0
375

Stockout

150
25

Cost
$11,500
$15,000
$14,500
$14,000
$5,500
$15,000
$2,500
$7,500
$85,500

Total cost for the plan is $85,500. We would recommend plan C over plan A or B.
b)
Plot the demand with a graph that also shows average requirements. Conduct your
analysis for January through August.
2,200
2,100
2,000
1,900
1,800

1,775

1,700
1,600
1,500
1,400
0

Jan Feb Mar Apr May Jun

Jul Aug