The dispatch department at UNILUS distributes course manuals to students on an annual basis and is open for 250 days per annum. In order to provide quality service to the students at optimal cost, a study was conducted with the following current data available:
Demand = 19500
manuals per year Ordering costs = R 25/order
Holding costs = R 4/unit/year
Lead time = 2 days
- Calculate the economic order quantity.
- Determine the annual holding costs.
- Determine the annual ordering costs.
- What is the re-order point?
Economic order quantity (EOQ) can be determined by using the following equation:
EOQ = sqrt (2DK/h),
where, D: annual demand, K: ordering cost of the manual and, h: annual holding cost
substituting the values of these parameters, we get:
EOQ = sqrt(2x19500x25/4) = 2,43,750
Annual holding cost = holding cost per unit x demand quantity = Rs. 4/unit/year x 19500 units = R 78,000
Annual Ordering cost = ordering cost/unit/year x demand = Rs 25/order/year x 19500
= R 4,87,500.
Reorder level = Average daily usage rate x lead time = (19500/250) x 2 days = 156 units
(where average daily usage rate is given as the ratio of total annual demand and number of days the dispatch section stays open.)
So, the re-order point is 156 units and as soon as the level reaches 156 units, a order must be place.