Narragansett Yacht Company

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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 units / 360)(10 days) = 41.67 = 42

Supplier B: (1500 units / 360)(20 days) = 83.33 = 84

4. Calculate the total inventory cost (the cost of ordering plus the cost of carrying inventories) that Narragansett would incur from each supplier. On the basis of the information developed thus far, which supplier should Narragansett use?

Total Inventory Cost = [(Carrying Cost)(Cost Per Unit)(Actual EOQ/2)] + [(Fixed Cost)(Usage/Actual EOQ)]

Supplier A: [(23%)($300)(209/2)] + [($1000)(1500/209) = $14,387.53

Supplier B: [(23%)($300)(148/2)] + [($500)(1500/148)] = $10,799.02

5.Narragansett currently carries a safety stock of 75 winches to protect itself against stockouts due to delivery delays and/or an increase in its usage rate. However, if it decides to switch to Supplier B, Narragansett would need to increase the safety stock to 150 units to reflect Supplier B’s longer lead time.

a. Assuming that the desired safety stock is currently on hand, what is the total cost of ordering and carrying inventories, including the safety stock, using Supplier A? What is the cost of using Supplier B?

Calculate your safety stock first…

Safety Stock = (Carrying Cost)(Safety Stock)(Unit Price)

Safety Stock Supplier A: (23%)(75)($300) = $5,175
Safety Stock Supplier B: (23%)(150)($300) = $10,350

Add the calculated safety stock to the total inv. costs worked out in Question 4…

Total Inv. Costs Supplier A: $14,387.53 + $5,175 = $19,562.53

Total Inv. Costs Supplier B: $10,799.02 + $10,350 = $21,149.02

b. How does the introduction of safety stocks affect the reorder points as calculated in Question 3?

Reorder Points = (Daily Units)(Delivery Time) + Safety Stocks … (When applicable)

Supplier A: (1500/360)(10) + 75 = 117
The reorder points went from 42 (worked in Q3) to 117 with safety stock added on.

Supplier B: (1500/360)(20) + 150 = 234
The reorder points went from 84 (worked in Q3)...
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