Problem 9A-5 Economic Order Quantity; Safety Stock; Just-in-Time Purchasing Impact [LO6]

Imagine It manufactures 3D printers and purchases one of the components used in the printers from a supplier in the U.S. Imagine It uses 4,000 of these components per year at a cost of $160 each.

The components are used evenly in the production process throughout a 360-day production year. The company estimates that it costs $20 to place a single purchase order and about $100 to carry each component in inventory for a year since it must be stored in a climate-controlled unit.

Delivery from the supplier generally takes two days, but it can take as many as six days. The days of delivery time and the percentage of their occurrence are shown in the following tabulation:

Delivery Time (Days)		Percentage of Occurrence
2		75
3		10
4		5
5		5
6		5
		100

Required: 1. Compute the EOQ.

2. Assume that the company is willing to assume a 15% risk of being out of stock. What is the safety stock? The reorder point?

3. Assume that the company is willing to assume only a 5% risk of being out of stock. What is the safety stock? The reorder point?

4. Assume a 5% stock-out risk as stated in (3) above. What is the total cost of ordering and carrying inventory for one year?

5. Refer to the original data. Assume that the company decides to adopt JIT purchasing policies. This change allows the company to reduce its cost of placing a purchase order to only $11.25. Compute the new EOQ.