Q1 Question 1

15 Points

Grading comment:

Round all order quantities to the nearest whole unit, and round all annual costs to the nearest whole dollar.

Suppose that your firm manufactures toy flying drones. Monthly demand for the drones is 230,000 units. Setup cost per order is $220, and the annual holding cost percentage is 24%. The drones cost $50 to produce and are sold for $99.

Question 1.1

Q1.1

5 Points

Grading comment:

If you have one warehouse, what is the economic order quantity for the drones?

What is the total of the annual setup and holding costs of this quantity?

Q1.2

5 Points

Grading comment:

Suppose that you have 56 warehouses instead of one, and total demand is equally distributed among the warehouses.

If setup and holding costs are the same in the smaller warehouses as they would be for the single large warehouse, what is the EOQ for the drones at each of the 56 warehouses?

Q1.3

5 Points

Grading comment:

Using centralized warehousing as in part a) means that products must be shipped over longer distances. Suppose that shipping costs $1.30 per unit when using one warehouse and $0.95 per unit when using 56 warehouses.

Which option should the company choose (centralized or decentralized?)

Justify your answer by calculations.

What is the total of the annual setup and holding costs AT EACH WAREHOUSE?

What is the total of the COMPANY'S annual setup and holding costs?

Q2 Question 2

15 Points

Grading comment:

A purchasing agent for a silicon wafer used in the production of semiconductors must decide among three sources.

Source A will sell the silicon wafers for $2.50 per wafer, independently of the number of wafers ordered. Source B will sell the wafers for $2.40 each but will not consider an order for fewer than 3,000 wafers, and Source C will sell the wafers for $2.30 each but will not accept an order for fewer than 4,000 wafers. Assume an order setup cost of $100 and an annual requirement of 20,000 wafers. Assume a 20% annual interest rate for holding cost calculations.

Which source should be used by the purchasing agent? What is the size of the standing order to be placed?

(Hint: Prepare a price schedule and go through the procedure discussed in class, to receive full credit)