AutoSupport Manufacturing, Inc. manufactures components used in the automotive industry. AutoSupport purchases parts for use in its manufacturing operation from a variety of different suppliers. One particular supplier provides a part where the assumptions of the EOQ model are realistic. The annual demand is 7000 units, the ordering cost is $100 per order, and the annual holding cost rate is 20%.
a. If the cost of the part is $30 per unit, what is the economic order quantity?
b. Assume 250 days of operation per year. If the lead time for an order is 5 days, what is the reorder point?
c. If the lead time for the part is four weeks (20 days), what is the reorder point? Compare this with the economic order quantity from part (a). Explain the relative size of these two quantities. Hint: Remember that the reorder point is expressed in terms of inventory position.
d. What is the reorder point for part (c) if the reorder point is expressed in terms of the inventory on hand rather than the inventory position?