4. Westside Auto purchases a component used in the manufacture of automobile generators
directly from the supplier. Westside’s generator production operation, which is operated at
a constant rate, will require 1000 components per month throughout the year (12,000 units
annually). Assume that the ordering costs are $25 per order, the unit cost is $2.50 per com-
ponent, and annual holding costs are 20% of the value of the inventory. Westside has 250
working days per year and a lead time of 5 days. Answer the following inventory policy
questions:
a. What is the EOQ for this component?
b. What is the reorder point?
c. What is the cycle time?
d. What are the total annual holding and ordering costs associated with your recom-
mended EOQ?
Answer:
4. a.
b.
c.
d. Holding
Ordering
Total Cost = $547.72
5. Suppose that Westside’s management in Problem 4 likes the operational ef?ciency of or-
dering once each month and in quantities of 1000 units. How much more expensive would
this policy be than your EOQ recommendation? Would you recommend in favor of the
1000-unit order quantity? Explain. What would the reorder point be if the 1000-unit quan-
tity were acceptable?