1. Calculate Keep-Kool’s EOQ for CU29 — Keep-Kool makes air conditioners purchases 000 units particular type compressor part each

Keep-Kool makes air conditioners. It purchases 12 000 units of a particular type of compressor part, CU29, each year at a cost of £50 per unit. Keep-Kool requires a 12% annual return on investment. In addition, relevant carrying costs (for insurance, materials handling, breakage and so on) are £2 per unit per year. Relevant costs per purchase order are £120.

Required

1. Calculate Keep-Kool’s EOQ for CU29.

2. Calculate Keep-Kool’s total ordering and carrying costs using EOQ.

3. Assume that demand is uniform throughout the year and is known with certainty. The purchasing lead time is half a month. Calculate Keep-Kool’s reorder point for CU29.

SOLUTION

1. Relevant carrying costs per part per year:

Required annual return on investment 12% × 50 = £6

Relevant insurance, materials handling, breakage, etc. costs per year 2