Break Even Analysis Sontek

Purchases → Video Galore → Sells

Information:

• Annual demand 13 000 packages
• 250 packages per week (13 000/52)
• 15%
• Purchase: delivery time 2 weeks

Ordering costs: 200 per order

a) Calculate the economic order quantity

Carrying costs:

3.10

Required rate of return for each unit: 15%*14 (purchasing cost) = 2.1

Total of 5.20

EOQ (economic order quantity)= sqrt(2*annual demand*cost per order) = sqrt((2*13000*200)/5.2)= 1 000

b) What is the total annual cost for video tapes?

Total annual cost = ((annual demand/order quantity)*cost per order) + ((order quantity/2)*annual carrying cost per unit) = (13000*200)/1000 + (1000*5.20)/2 = 2 600 + 2 600

These are always supposed to be equal.[pic 1]

d)

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13 000/1 000 = 13 per year

Reordering point

• Order quantity 1 000
• Demand each week 250
• Purchase lead line 2 weeks

250 per week * 2 weeks = Reordering point 500

e)

Safety stock units: No safety stock

Demand resulting in stockouts: 600

Stockout: 600 – 500 = 100

Stockout costs: 100*4=400

Number of orders per year: 13

Probability of stockout: 0.20

Expected stockout costs: 400*13*0.20 = 1040

Carrying costs: 0 (as we had no stock)!

Safety stock units: No safety stock

Demand resulting in stockouts: 700

Stockout: 700 – 500 = 200

Stockout costs: 200*4=800

Number of orders per year: 13

Probability of stockout: 0.09

Expected stockout costs: 800*13*0.09 = 936

Carrying costs: 0

Safety stock units: No safety stock

Demand resulting in stockouts: 800

Stockout: 800 – 500 = 300

Stockout costs: 300*4=1200

Number of orders per year: 13

Probability of stockout: 0.06

Expected stockout costs: 1200*13*0.06 = 936

Carrying costs: 0

Total annual cost: 2912 + 0 = 2912

With a safety stock of:

100 → 1612