Litespeed Products buys 200,000 motors per year from a supplier that can fulfill orders within two days

Question:

Litespeed Products buys 200,000 motors per year from a supplier that can fulfill 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 $295 per order and its carrying cost is about $37 per motor per year. The firm maintains a safety stock of motors equal to six days usage. Assume a 365-day year.

a. What is Litespeed’s economic order quantity (EOQ) for the motors?

b. What is its total cost at the EOQ?

c. How large a safety stock (in units) of motors should Litespeed maintain?

d. What is Litespeed’s reorder point for motors? (Hint: Be sure to include the safety stock.)

e. If Litespeed has an opportunity to reduce by 10 percent either its order cost or its carrying cost, which would result in the lowest total cost at the associated new EOQ?

f. How much total cost savings will result from the lowest-cost strategy found in part (e) relative to the total cost found in part (b)?

Economic Order Quantity
Economic order quantity (EOQ) is the ideal order quantity a company should purchase to minimize inventory costs such as holding costs, shortage costs, and order costs. This production-scheduling model was developed in 1913 by Ford W. Harris and has...