Custom Computers, Inc. assembles custom home computer systems. The heat sinks for the central processing units are bought for $12 each and are ordered in quantities of 1300 units. Annual demand is 5200 heat sinks, the annual inventory holding cost is $3 per unit, and the cost to place an order is estimated to be $50. Assume that demand occurs continuously through the year and that a new order is placed in time so the order arrives at the same time as the previous inventory runs out.
(a) Construct a base-case spreadsheet model to help analyze different order quantities. The primary output of interest is the total annual inventory-related cost, comprising total ordering cost and total holding cost. Holding cost can be applied to the average inventory level through the year. Given the assumption about continuously occurring demand and that orders arrive just in time, the average inventory level will be half of the order quantity.
(b) For the base-case order quantity of 1300 heat sinks, what is the average inventory level, the number of orders placed per year, the total annual inventory holding cost, the total annual ordering cost, and the total annual cost?
(c) Repeat (b) for an order quantity of 650 heat sinks. Repeat for 1950 heat sinks.
(d) The Economic Order Quantity (EOQ) is defined as the order quantity that minimizes total inventory-related costs. Construct a Data Table and an XY chart and find the EOQ for this situation.
(e) How much would ordering the EOQ save Custom Computers on an annual basis, compared to its current order quantity?