Provide your detailed answers below every part of each question.
Metro Tech buys three components from a local wholesaler. The annual demand for components A, B, and C is 500, 3000, and 6000 units respectively. The agreed purchase price is $20, $15, and $10per unit for A, B, and C respectively for each product. The holding cost is estimated to be 20% per year. The ordering cost consists of handling and trucking costs. The handling cost is $100 for each type of component regardless of the number of items ordered. In addition to the handling cost, Metro Tech must pay a trucking cost of $500 for each delivery regardless of the total number of components in the order. Currently, all three items are being ordered independently using EOQ models. A proposal has been made to combine the ordering of the three items to save on trucking costs. Analyze the current and the prosed scenario and show the results below.
Input Data:
ABCCombined Order
Demand items/year No Change
Item Cost in $/item No Change
Holding Cost as %/year No Change
Ordering Cost $/order
Current Scenario Analysis (Independent ordering):
ABCTotal
# of Orders/ year
Economic Order Quantity
Holding Cost in $/year
Ordering Cost in $/Year
Total Cost of ordering Independently
Proposed Scenario Analysis (Joint ordering):
ABCTotal
# of Orders/ year
Economic Order Quantity
Holding Cost in $/year
Ordering Cost in $/Year
Total Cost of ordering Jointly
Total cost savings due to ordering jointly: __________________________________
Can you estimate the total savings in trucking costs? Why is this different from total savings?
Analysis of Current Scenario (Independent Ordering):
To analyze the current scenario, we need to calculate the number of orders per year, the economic order quantity, the holding cost, the ordering cost, and the total cost of ordering independently for each component.
For Component A:
Demand per year = 500 units
Ordering cost = Handling cost + Trucking cost = $100 + $500 = $600
Number of orders per year = Demand per year / Economic Order Quantity
Economic Order Quantity = √((2 * Demand per year * Ordering cost) / Holding cost)
Holding cost = Item cost * Holding cost as % per year
Let's calculate the values:
For Component A:
Number of orders per year = 500 / EOQ_A
EOQ_A = √((2 * 500 * $600) / ($20 * 0.20))
Holding cost in $/year = $20 * 0.20 * EOQ_A
Ordering cost in $/Year = Number of orders per year * Ordering cost
Total Cost of ordering Independently for Component A = Holding cost in $/year + Ordering cost in $/Year
Similarly, we can calculate the values for Component B and Component C.
Now let's calculate the values for all three components and find the Total Cost of ordering Independently.
For Component B:
Number of orders per year = 3000 / EOQ_B
EOQ_B = √((2 * 3000 * $600) / ($15 * 0.20))
Holding cost in $/year = $15 * 0.20 * EOQ_B
Ordering cost in $/Year = Number of orders per year * Ordering cost
For Component C:
Number of orders per year = 6000 / EOQ_C
EOQ_C = √((2 * 6000 * $600) / ($10 * 0.20))
Holding cost in $/year = $10 * 0.20 * EOQ_C
Ordering cost in $/Year = Number of orders per year * Ordering cost
Total Cost of ordering Independently = Total Cost of ordering Independently for Component A + Total Cost of ordering Independently for Component B + Total Cost of ordering Independently for Component C
Analysis of Proposed Scenario (Joint Ordering):
In the proposed scenario, we will combine the ordering of all three components to save on trucking costs. The demand items per year and the item cost remain the same, but the ordering cost will change.
In the joint ordering scenario, we will have a single order for all three components. The trucking cost will be incurred only once for this single order.
Let's calculate the number of orders per year, the economic order quantity, the holding cost, the ordering cost, and the total cost of ordering jointly for all three components.
Number of orders per year for Joint Ordering = Demand per year / EOQ_Joint
EOQ_Joint = √((2 * (Demand_A + Demand_B + Demand_C) * Trucking cost) / ((Item Cost_A + Item Cost_B + Item Cost_C) * Holding cost as % per year))
Holding cost in $/year = (Item Cost_A + Item Cost_B + Item Cost_C) * Holding cost as % per year * EOQ_Joint
Ordering cost in $/Year = Number of orders per year for Joint Ordering * Trucking cost
Total Cost of ordering Jointly = Holding cost in $/year + Ordering cost in $/Year
Total Cost Savings due to Ordering Jointly:
Total cost savings due to ordering jointly = Total Cost of ordering Independently - Total Cost of ordering Jointly
Estimating Total Savings in Trucking Costs:
The total savings in trucking costs can be estimated by calculating the difference between the trucking costs incurred in the current scenario and the trucking costs incurred in the proposed scenario.
Total Savings in Trucking Costs = Trucking cost per order in Current Scenario - Trucking cost in Proposed Scenario
The total savings in trucking costs can be different from the total savings because in addition to trucking costs, there are other factors such as holding costs and ordering costs that contribute to the total cost savings.