Derakhshan Case

The Derakhshan Division of Gilmore Co Inc. provides emerald precious stones. The stones should be shipped in a particular box which keeps the gem safe in shipping and has a label so customer know how to contact for another order. Derakhshan buy these boxes from Kohe Noor Company (supplier). For coming year Derakhshan needs 115 of these boxes daily. The current price of this box is $30. Under the present arrangement with the supplier, the Derekhshan must take one twelfth of its annual need every month. This agreement was reached in order to reduce lead time by assuring Gilmore a regular spot on the supplier’s production schedule. Without this agreement, the lead time would be about 14 weeks. No quantity discounts are offered on these boxes; however, the supplier requires that a minimum of 500 boxes be on an order. Derakhshan has enough space to store boxes. Derakhshan stores the emerald stones in a separate safe storage under highly protected environment.

Associated with each shipment of boxes is ordering costs of $200, which include all the costs. In addition, inventory carrying costs (including taxes) on all items are considered to be 15% of the purchase price per unit per year. (Consider each week as 5 working days).

1) What is optimal order number of boxes that should be placed in each order?

2) Determine the number of orders per year?

3) What is the optimal reorder for boxes?

4) What cost saving will Derakhshan Inc. realize if it implements an order based on EOQ? (Hint, estimate the total cost under optimal solution and total cost under current situation, then compare the two situations).