Apply the Concept

Reparan Corporation does warranty work for a major producer of surface tablets. The following values apply for a part used in the repair of the surface tablets (the part is purchased from external suppliers):

D = 100,000 units

Q = 500 units

P = $80 per order

C = $4 per unit

Required:

1. Calculate the following:

Number of orders:

Ordering cost: $

Average inventory:

Carrying cost: $

Total inventory cost: $

2. Calculate the following:

EOQ =

Ordering cost for EOQ = $

Carrying cost for EOQ = $

Total Cost for EOQ = $

3. Suppose Reparan Corporation enters into an exclusive supplier agreement with one supplier who will supply all of the demands with smaller more frequent orders. Under this arrangement, the ordering cost is reduced to $0.80 per order. Calculate the following:

EOQ =

Ordering cost for EOQ = $

Carrying cost for EOQ = $

Total Cost for EOQ = $

The above results show that smaller, more frequent orders can significantly reduce the cost of inventory. This result foreshadows the power of JIT purchasing .