A company annually consumes 10,000 units of Part CThe carrying cost of this part is $2 per year and the ordering costs are $100.The company uses an order quantity of 500 units.If the company operates 200 days per year,and the lead time for ordering Part C is 5 days,what is the order point?

Question

Quizplus · Accepted Answer

Order point = (average daily usage x lead time) + safety stock

Average daily usage = Annual usage / number of working days per year
= 10,000 units / 200 days
= 50 units per day

Lead time = 5 days

Safety stock = z-score x standard deviation of demand during lead time x average daily usage
Since the demand during lead time is not given, we assume it to be the same as the average daily usage.
z-score for 95% service level = 1.65 (from standard normal distribution table)
Standard deviation of demand during lead time = square root of lead time x variance of daily demand
Variance of daily demand = average daily demand squared = 50^2 = 2500
Standard deviation of demand during lead time = square root of 5 x 2500 = 111.8 (approx)

Substituting these values in the formula for safety stock, we get:
Safety stock = 1.65 x 111.8 x 50 = 9,185 (approx)

Order point = (50 x 5) + 9,185
= 9,435

Rounding off to the nearest multiple of the order quantity (500), we get:
Order point = 9,500
Since this is greater than the order quantity, we take the next multiple of 500 as the order point.
Order point = 10,000 - 500 (to avoid stockout)
= 9,500
Therefore, the best choice is A (250 units), as it is less than the calculated order point.

A Company Annually Consumes 10,000 Units of Part CThe Carrying