Competency 309.3.1: Decision Making Models - The graduate uses optimizing models and other models as aids for making more informed decisions.
Objective 309.3.1-06: Determine order size using the economic order quantity model.
Objective 309.3.1-07: Determine lot size using the economic production lot size model.
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Introduction:
A variety of criteria and techniques can be used to determine how many units of a product to purchase or produce and what parameters to set for inventory management. In this task, apply the economic order quantity model and the economic production lot model to related decisions.
Given:
Company A’s demand is uniform throughout the year and totals 18,000 units per year. Ordering costs total $38 per order. The annual holding cost rate is 26% of the value of the inventory. The per-unit cost of inventory is $12.
Company B’s demand is uniform throughout the year and totals 15,000 units per year. The production setup costs total $84 per setup. The annual holding cost rate is 28% of the value of the inventory. The per-unit cost of finished product is $19. The production rate is constant and equivalent to 60,000 units per year.
Task:
Write a brief response in which you:
A. Determine the order size for Company A in the given scenario that would minimize total annual cost by using the economic order quantity model.
B. Determine the lot size for Company B in the given scenario that would minimize total annual cost by using the economic production lot size model.
C. If you choose to use outside sources, include all in-text citations and references in APA format.
Note: Please save word-processing documents as *.rtf (Rich Text Format) files.
Note: For definitions of terms commonly used in the rubric, see the attached Rubric Terms.
