Questions
- What is the economic order quantity for BBE in units? In Pounds?
- What is the total cost ( not considering transportation related costs) of the EOQ?
- What is the total cost for using motor carrier transportation?
- What is the total cost for using motor carrier transportation?
- Which alternative should BBE use?
Answer 1:
Annual Demand/Order Quantity (Q) = 5000 cases
Cost per Unit (CU) -- $200
Cost per Order (CO) ---$100
Carrying Cost (CC) % (as % of CU)—0.28
So EOQ = SQRT((2Q* CO)/(CU*CC%))= SQRT((2*5000*100)/(.28*200))=SQRT(10000000/56)
= 133.6 or approximately 134
So the EOQ is 134 units or 6700 lbs.
Answer 2:
Total Cost of EOQ without transportation Cost = CU*Q+CO(Q/EOQ) +CC(EOQ/2)
= 200*5000+100(5000/134) +56(134/2) = $1007483
Answer 3:
Cost of transportation using motor carrier= $0.80 per 100 lbs
Transportation Cost = 5000*50*.80/100 = $2000
Annual intransit inventory Level = In transit Inventory in each shipment * Number of days in transit/365 * number of shipments per year
= 134*(5/365) * (5000/134)=5000*5/365 = 68.5 Units
Cost of In transit inventory = 68.5 * 200 *.18 = 2465
So Total cost including transportation of motor carrier cost =$1007483 +$2000+$2465 =$1011949
Answer 4:
Cost of transportation using air carrier= $1.50 per 100 lbs
Transportation Cost = 5000*50*1.50/100 = $3750
Annual intransit inventory Level = In transit Inventory in each shipment * Number of days in transit/365 * number of shipments per year
= 134*(2/365) * (5000/134)=5000*2/365 = 27.4 Units
Cost of In transit inventory = 27.4 * 200 *.18 = $986.3
So total cost = =$1007483 +$3750+$986.3 =$1012219
Answer 5:
As total cost using motor carrier = $1011949 ( found in answer 3)
And total cost using air carrier = $1012219 ( found in answer 4)
As motor carrier cost is lower than total cost of air carrier so BBE should use motor carrier .
