P8-20A Economic Order Quantity and Safety Stock

Your company uses a small casting in one of its finished products. The casting s are purchased from a foundry located in another state. In total, the company purchases 54,000 castings per year at a cost of $8 per casting.

The castings are used evenly throughout the year in the production process on a 360-day-peryear basis. The company estimates that it costs $90 to place a single purchase order and $3 to carry one casting in inventory for a year. The high carry costs result from the need to keep castings in carefully controlled temperature and humidity conditions, and from the high cost of insurance.

Delivery from the foundry generally takes 6 days, but it can take as much as 10 days.

REQUIRED:

1. Compute the economic order quantity (EOQ)

2. Assuming the maximum lead time is 7 days, compute

a. the safety stock and

b. the reorder point.

3. Assuming the maximum lead time is 9 days, compute

a. the safety stock and

b. the reorder point

4. Assuming the same facts in part 3, compute the total cost of ordering and carrying inventory for one year.

5. Refer to the original data. Assume that the purchasing process is improved and the company reduces it cost of placing a purchase order to only $6. Also, the company estimates that when the waste and inefficiency caused by inventories is considered, the true cost of carrying a unit in stock is $7.20 per year.

a. Compute the new EOQ

b. How frequently would the company place na order compared to the oold purchasing policy?