GasBag Industries is a specialty distributor of whoopee cushions. Its current market area encompasses Alabama, Georgia, and Florida. The whoopee cushions are manufactured in Texas, packed in boxes and shipped to north Alabama via motor carrier. There are 24 units in each box. The VP of Supply Chain Management has asked the distribution manager to evaluate using air carrier service to ship the whoopee cushions.
The following information was collected by the distribution manager (10 possible points)
• R (annual demand) in units = 60,000
• V (value) per box = $25
• W (inventory carrying cost) = 29%
• A (order cost) = $75
• Y (in-transit carrying cost) = 21%
• tm (motor carrier) = 8 days
• ta ( air carrier) = 2 days
• Weight = 5 lbs per box
• Motor Carrier Rate = $0.70 per 50 lbs
• Air Carrier Rate = $1.25 per 50 lbs
• use 365 days per year
a. What is the economic order quantity? In pounds?
b. What is the total cost (NOT considering transportation - related costs) of the EOQ?
c. What is the total cost for using motor carrier transportation?
d. What is the total cost for using air carrier transportation?
e. Which alternative should GasBag use?
f. Discuss EOQ. What is it and why is it important?