Question 5
Your company purchases parts from the supplier and you will need 1000 parts per month. Ordering costs are £25 per order, and the unit cost is £2.50. Annual holding costs are charged at 20% of the unit purchase cost (per component). There are 250 working days per year and the lead time is 5 days.
a. What is the EOQ and reorder point for this component?
b. What are the total holding and ordering costs associated with your recommended EOQ?
c. In the EOQ model, does the optimal order quantity increase or decrease if the demand
rate is increased? If the order cost is increased? If the unit holding cost is increased? In
each case, what is the intuitive explanation?
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