Narragansett Yacht Company
1. What is the economic order quantity for standard 5-inch winches if they are ordered from (a) Supplier A, and (b) Supplier B? Round your answers up to the next whole unit, because Narragansett cannot order a fraction of a winch.
EOQ = square root of ( 2 x R x A) V x W
R = annual demand is 1500 units A = ordering cost is $1,000 for Supplier A and $500 for Supplier B V = cost per unit is $300 W = carrying cost percentage is 23%
Supplier A: EOQ = Square root of (2 x 1500 x $1,000) = S.R. of 3,000,000 = 209 ($300 x 23%) 69
Supplier B: EOQ = Square root of (2 x 1500 x $500) = S.R. of 1,500,000 = 148 ($300 x .23) 69
2. What assumptions are implied in the EOQ model? Do these assumptions appear reasonable when applied to Narragansett Yacht?
-Usage is known with certainty -Usage is relatively constant overtime -No shortages are allowed -Lead time for the receipt of order is constant -The order quantity is received all at once -Demand is seasonal, but parts can be used throughout the year.
These assumptions would not appear reasonable because there isn’t enough information to determine if demand is known with certainty or if the demand is relatively constant over time.
3. a. How many orders should be placed each year if Narragansett buys from Supplier A? If the firm buys from Supplier B?
Order placed each year = Expected Annual Usage Actual EOQ
Supplier A: 1500 units = 7.117 209 EOQ
Supplier B: 1500 units = 10.14 148 EOQ
b. What is the reorder point (in units) for each supplier? Assume for now that no safety stocks are held and use a 360-day year.
Reorder Point = (Daily Usage Rate)(Delivery Time)
Supplier A: (1500
EOQ = square root of ( 2 x R x A) V x W
R = annual demand is 1500 units A = ordering cost is $1,000 for Supplier A and $500 for Supplier B V = cost per unit is $300 W = carrying cost percentage is 23%
Supplier A: EOQ = Square root of (2 x 1500 x $1,000) = S.R. of 3,000,000 = 209 ($300 x 23%) 69
Supplier B: EOQ = Square root of (2 x 1500 x $500) = S.R. of 1,500,000 = 148 ($300 x .23) 69
2. What assumptions are implied in the EOQ model? Do these assumptions appear reasonable when applied to Narragansett Yacht?
-Usage is known with certainty -Usage is relatively constant overtime -No shortages are allowed -Lead time for the receipt of order is constant -The order quantity is received all at once -Demand is seasonal, but parts can be used throughout the year.
These assumptions would not appear reasonable because there isn’t enough information to determine if demand is known with certainty or if the demand is relatively constant over time.
3. a. How many orders should be placed each year if Narragansett buys from Supplier A? If the firm buys from Supplier B?
Order placed each year = Expected Annual Usage Actual EOQ
Supplier A: 1500 units = 7.117 209 EOQ
Supplier B: 1500 units = 10.14 148 EOQ
b. What is the reorder point (in units) for each supplier? Assume for now that no safety stocks are held and use a 360-day year.
Reorder Point = (Daily Usage Rate)(Delivery Time)
Supplier A: (1500