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Decision Making Models

Introduction:

A variety of criteria and techniques can be used to determine how many units of a product to purchase or produce and what parameters to set for inventory management. In this task, apply the economic order quantity model and the economic production lot model to related decisions.

Given:

Company A’s demand is uniform throughout the year and totals 18,000 units per year. Ordering costs total $38 per order. The annual holding cost rate is 26% of the value of the inventory. The per-unit cost of inventory is $12.

Company B’s demand is uniform throughout the year and totals 15,000 units per year. The production setup costs total $84 per setup. The annual holding cost rate is 28% of the value of the inventory. The per-unit cost of finished product is $19. The production rate is constant and equivalent to 60,000 units per year.

Task:

Write a brief response in which you:

A. Determine the order size for Company A in the given scenario that would minimize total annual cost by using the economic order quantity model, showing all of your work.

B. Determine the lot size for Company B in the given scenario that would minimize total annual cost by using the economic production lot size model, showing all of your work.

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