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Cct495 Blanchard Case Study Eoq and Rop Calculations

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  1. In the Blanchard case study, the EOQ and ROP is calculated using the designated formulae where EOQ = sq^ (2RS/CK) and ROP = {3.5/52(weeks)} * R. However, the values used in the initial calculation is inaccurate for the following reasons:
  • In the case study the total setup cost (S), which is S = Blending setup cost + size changeover cost + label changeover cost + order processing cost, with size changeover cost given at the constant cost of = $8.85, and the label changeover cost = $11.78. Nevertheless, while using the formula given to confirm the aforementioned value, we found that these values were incorrect. Additionally, we also found the total fixed overhead allocation that would change the overall unit cost, as we are only given the fixed overhead allocation for one case. Once these elements are corrected we would also have to predict demand or R using the percentage change in the demand for the years 1971 and 1972.Therefore in order to correct the values of EOQ and ROP we would require changing C or the unit cost as one variable i.e. fixed overhead allocation changes due to the total units sold forecasted for the year 1972. Additionally, through the changed values for size changeover cost and label change over cost we would get the updated S value. Finally, the ROP value will be affected as the forecasted demand for the year 1972 will be calculated using percentage change.
  1. Using the information given the case study “Size changeover cost equaled the cost of resetting all machinery for a change in bottle size divided by the average number of different items of a given size processed between size changeovers.”
  • Applying the formula, $23000 which is the amount paid to Bob and Elliot as their annual wage, which is also equivalent to the cost of resetting all the machinery for change in bottle size as it was their time i.e. a whole day to acquire the complete machinery adjustments. Additionally, the average number of different items of a given size is 10 according to the case study, for a year you would multiply 10 with 365. Putting it back in the equation = 23000/(365*10), we get a value of 6.3014 as the new size change over cost, which is a constant. The order processing cost is $51.4 (18000/350) given as a constant.
  • Moving on to the label change over cost was based on the average length of time it took to change one label to another label of a same bottle size, while the bottling line was shut down or idle. Since Bob and Elliot along with the five temp employees are working on the label changeover, the length of time that the bottling machine was idle is 30 minutes for both the groups. When converting the idle time to decimal = 0.5. For the five temp employees the 30 min labor cost would be the number of employees*their hourly rate* the number of minutes the bottling line was shut (0.5). = 5*2.5*0.5 = 6.25. We do not divide it with the number of hours worked daily as these employees are temporary and do not work annually, but on hourly basis. Looking at the second group, which is Bob and Elliot, to find out their labor cost of 30mins, we would take their annual wage $23000 and multiply it by the time (0.5) to get the proportion of their wages allocated for the 30 mins, which is $11500. Since they work 8 hours a day we would divide the total of $11500 by the number of hours worked in a year (365*8 = 2920) that gives us a value of $3.938. Adding the two values of $3.94+6.25=$10.188 as the total label change over cost. Therefore, by combining the label changeover cost and the size changeover cost, the new S for vodka, for example would be according to the formula = 1.15+6.301+10.188+51.4286 = 69.0683 (New values for total S is on the additional Excel document)
  • The next variable to correct before we can get the correct values for EOQ and ROP is the unit cost. This would change because we need the total fixed overhead allocation for all five items. Given that the fixed overhead per case is $1.31 we would require to multiply this value by the total demand for all alcohol for the year 1971 and divide that by the total units sold for the year 1972, which is 0.944. (calculation shown on excel). Once this value is found, we plug it back in to the Unit Cost equation, i.e. “C = Materials cost + bottling labor + fixed overhead allocation + variable overhead + customs duty + federal

distilled spirits tax + federal rectification tax” = Vodka: 0.93 + 1.27 + 0.10 + 0.944 + 0.50 + 0 + $25.2 + 0 = $28.944. (The remaining 4 alcohol is on excel)

  • Once we have the updated C and S, we also need to determine the demand or R for the year 1972. Looking back at the demand values for 1971 as given in exhibit 5, and the values of demand for the first five months of the year 1972, we are able to forecast the demand for the remaining 7 months and thereby the annual demand through a percentage change. By subtracting new total demand (1972) from the old total demand (1971) (from January to May) and dividing that by the old total demand we get the percentage change in the demand over the two years. After which this percentage is applied on the annual demand for 1971 to forecast the annual demand for 1972.  For instance, in the case of vodka, the percentage change was 74.72% and the annual demand for 1971 is $2715, the demand for 1972 would be $4744. ({0.7472*2715} +2715) [further calculations on excel]
  • After the values of C, S, R, are acquired and they are plugged back into the EOQ and ROP equation, to get the values for 1972. Once these values are attained, we then compare it with the EOQ and ROP values of 1969.
  1. While using the EOQ and ROP model one major disadvantage is that Blanchard has assumptions for its variables. For instance, the annual demand was to be predicted through given values without taking into consideration the errors that might occur, leading to overstock or understock. The EOQ model is based on the assumptions that there is no uncertainty and that there is a known annual demand at a constant rate. Since these conditions were not met in the Blanchard case study the EOQ calculations are not accurate. Another issue with Blanchard’s EOQ/ROP is that there is no safety stock in place in the case that they need more stock as the carrying cost increases. Therefore, we would recommend that to find a more suitable method of calculating demand as solely using percentage change does not forecast an accurate number.



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