QAT Task 3

Order size for Company A.

To find the order size for Company A you need to use the economic order quantity model. This will give the smallest total cost to the company. First you need to find the holding cost. To find the holding cost you multiply the annual holding cost rate by the unit cost of the item (Ch=IC). In this example the annual holding cost rate is 3% and the unit cost is $500 (Ch=3%X$500 or Ch=$15). Now that you have the holding cost you can find the optimal order size. To find the optimal order size you take the square root of 2 times the demand times the ordering cost divided by the holding cost. Q*= the square root of 2(D)(Co)/Ch or Q*= the square root of 2(400,000)(42)/15. When you complete this equation you get 1,496.66. Because you can not create a partial laptop you need to round up. Thus giving you 1,497 laptops as the optimal ordering size.

B. Lot size for Company B.

To find the lot size for Company B you need to use the economic production lot size model. First you need to find the holding cost. To find the holding cost you multiply the annual holding cost rate by the unit cost of the item (Ch=IC). In this example the annual holding cost rate is 4% and the unit cost is $250 (Ch=4%X$250 or Ch=$10). Now that you have the holding cost you can find the optimal lot size To find the optimal lot size you take the square root of 2 times the demand times the set up cost divide by the holding cost times 1 minus demand over the production. Q* = the square root of 2(D)(Cs)/Ch(1-D/p) or Q*= the square root of 2(5,200,000)($500)/$10(1-5,200,000/88,400,000). When you complete this equation you get 23,505.318547065042. Because you can not create a partial lot you need to round up. This gives you 23,506 as the optimal lot