asper Inc., a company
that sells air conditioning units for cars intends to reduce its total annual
inventory cost. The annual demand is between 6,500 units if market condition is
unfavorable and 8,000 units if market conditions are favorable. The Purchasing
& Warehousing Manager estimates that the ordering cost is $20.50 per order
and the holding cost is $1.50 per unit per year.
a. (1.5 POINTS) –
Calculate the Economic Order Quantity (EOQ), Annual Ordering Cost, Annual
Holding Cost and Total Annual Inventory Cost under unfavorable and favorable
market conditions.
b. (1.0 POINT) – If the
probability for unfavorable and favorable market conditions is 35% and 65%
respectively, calculate the expected EOQ considering these probabilities.
c. (1.5 POINT) – The
Purchasing & Warehousing Manager identified two improvement projects in
conjunction with her team: Project A: Reduction of ordering cost to $18.00.
Project B: Reduction of holding cost to $1.50 per unit per year. Which project
would result in greater reduction of the EOQ and Total Annual Inventory Cost?
Provide your recommendations.
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