Products
Rewards
from HOLOOLY

We are determined to provide the latest solutions related to all subjects FREE of charge!

Enjoy Limited offers, deals & Discounts by signing up to Holooly Rewards Program

HOLOOLY

HOLOOLY
TABLES

All the data tables that you may search for.

HOLOOLY
ARABIA

For Arabic Users, find a teacher/tutor in your City or country in the Middle East.

HOLOOLY
TEXTBOOKS

Find the Source, Textbook, Solution Manual that you are looking for in 1 click.

HOLOOLY
HELP DESK

Need Help? We got you covered.

## Q. 12.EX.6

EOQ IS A ROBUST MODEL. Management in the Sharp, Inc., examples underestimates total annual demand by 50% (say demand is actually 1,500 needles rather than 1,000 needles) while using the same Q. How will the annual inventory cost be impacted?
APPROACH $\blacktriangleright$ We will solve for annual costs twice. First, we will apply the wrong EOQ; then we will recompute costs with the correct EOQ.

## Verified Solution

SOLUTION $\blacktriangleright$ If demand in Example 5 is actually 1,500 needles rather than 1,000, but management uses an order quantity of Q = 200 (when it should be Q = 244.9 based on D = 1,500), the sum of holding and ordering cost increases to $125: Annual cost = $\frac{D}{Q}S + \frac{Q}{2}H = \frac{1,500}{200}(\ 10) + \frac{200}{2}(\ .50)$ =$75 + $50 =$125

However, had we known that the demand was for 1,500 with an EOQ of 244.9 units, we would have spent $122.47, as shown: Annual cost = $\frac{1,500}{244.9}(\ 10) + \frac{244.9}{2}(\ .50)$ = 6.125($10) + 122.45($.50) =$61.25 + $61.22 =$122.47

INSIGHT $\blacktriangleright$ Note that the expenditure of $125.00, made with an estimate of demand that was substantially wrong, is only 2% ($2.52/$122.47) higher than we would have paid had we known the actual demand and ordered accordingly. Note also that were it not due to rounding, the annual holding costs and ordering costs would be exactly equal. LEARNING EXERCISE $\blacktriangleright$ Demand at Sharp remains at 1,000, H is still$.50, and we order 200 needles at a time (as in Example 5). But if the true order cost = S = $15 (rather than$10), what is the annual cost? [Answer: Annual order cost increases to $75, and annual holding cost stays at$50. So the total cost = \$125.]

RELATED PROBLEMS $\blacktriangleright$ 12.10b, 12.16 (12.36a,b are available in MyOMLab)