Exam 16: Performance Evaluation and Compensation

Economic Order Quantity (EOQ) is calculated as:

Safety stock is an extra quantity of goods above what is known to be needed to meet sales or production.

As order quantity increases quantity discounts often become:

LAMA Creations creates sweaters using the wool of the Llama. The wool used in the manufacturing process is ordered by the bundle. LAMA requires 1,200 bundles of Llama wool per year and places orders of 100 bundles at a time. The cost of ordering is $80.00 per order and the carrying cost per bundle is $3.50. What is the economic order quantity for Lama Creations.

LAMA Creations creates sweaters using the wool of the Llama. The wool used in the manufacturing process is ordered by the bundle. LAMA requires 1,200 bundles of Llama wool per year and places orders of 100 bundles at a time. The cost of ordering is $80.00 per order and the carrying cost per bundle is $3.50. What are LAMA Creations' carrying costs?

The carrying costs of holding inventory is expressed as "Carrying Costs = Q/2 x H" where H is:

For most managers, to manage inventory availability for customers an order at the economic order quantity is ordered when the inventory level is zero.

Safety stock is calculated as the difference between the maximum daily usage and the:

Using the economic quantity approach to ordering, variations in demand or usage rates will lead to inventory shortfalls or holding excess inventory.

To determine the impact of quantity discounts on the economic order quantity, the total cost equation is calculated at the economic order quantity amount and then at each of the quantity discount points.

Titan Company, a distributor of high quality pens, carries a safety stock of pens. If the maximum daily usage is 70, the average daily rate of usage is 50 pens per day and the number of lead days of 5 required by the supplier. Titan Company does not carry any safety stock. What is the re-order point for ordering pens?

When the economic order quantity results in not taking quantity discounts, the foregone discount is an opportunity cost and needs to be considered in the decision-making process.

Titan Company, a distributor of high quality pens, carries a safety stock of pens. If the maximum daily usage is 70, the average daily rate of usage is 50 pens per day and the number of lead days of 5 required by the supplier. What is the re-order point for ordering pens?

LAMA Creations creates sweaters using the wool of the Llama. The wool used in the manufacturing process is ordered by the bundle. LAMA requires 1,200 bundles of Llama wool per year and places orders of 100 bundles at a time. The cost of ordering is $80.00 per order and the carrying cost per bundle is $3.50. LAMA Creations' ordering cost will change to $90.00 per order if the order quantity is increased from 100 bundles to 200 bundles. What order quantity should be placed in this case?

To minimize inventory management costs, a manager would place large, infrequent orders.

The costs of ordering inventory and the cost of holding inventory increase and decrease consistent with one another.

The cost of inventory management is expressed in the following equation:

LAMA Creations creates sweaters using the wool of the Llama. The wool used in the manufacturing process is ordered by the bundle. LAMA requires 1,200 bundles of Llama wool per year and places orders of 100 bundles at a time. The cost of ordering is $80.00 per order and the carrying cost per bundle is $3.50. LAMA Creations' cost may change if the order quantity is increased from 100 bundles to 200 bundles at a time. What is the cost difference between the ordering costs with orders of 100 bundles as compared to orders of 200 bundles?

Ordering costs decline as the order quantity increases while carrying costs increase as the order quantity increases.