Question

SS company manufacturing electronic equipment purchase transistors @30 per unit the annual requirement of transistors is 5000 units. The ordering cost is 200 per order. Carrying cost is 4/- per unit, lead time is 5 days. Calculate EOQ and reorder point.​

Answer 1

The Economic Order quantity should be 707.17 units.

The Re-Order level should be 271.8 units.

Explanation:

We have the following information available to us,

A(Annual demand of Transistors) = 5,000 units

O(Ordering cost per order) = Rs.200

C(Carrying cost per unit per annum) = Rs.4

Normal/Average Lead Time = 5 days

*Since there was no information given about the lead time type(Maximum/Minimum),therefore we have taken it to be Normal/Average Lead time.

Economic Order Quantity(EOQ) = $\sqrt{} 2\times A\times O$

                                                                                     

                                                                 $\sqrt{} C$

EOQ = $\sqrt{} 2 \times 5000 \times 200 / \sqrt{} 4$

        = 707.17 units

Re-Order level = Minimum Stock level or Buffer stock level + {Normal usage x normal lead time}                   ---------------[1]

Now,to calculate Re-order level,we need Minimum stock level.

Minimum stock level or Buffer stock level can be calculated as follows:

Average stock level = Minimum stock level + 1/2 x EOQ

Average stock level =  Buffer stock level + $707.17 \times \dfrac{1}{2}$

Buffer stock level = 353.59 - Average stock level       ------ [2]

Putting Equation [2] in Equation [1],we get-

Re-order level = 353.59 - Average stock level + { Normal/Average usage x           Normal/Average lead time}

Re-order level = 353.59 - $\dfrac{5000}{365} + [ \dfrac{5000}{365} \times 5]$

                       

                       = 353.59 - 13.7 + 68.5

Re-Order level  = 271.8 units(rounded off)