The Scottish manufacturer Lasim needs to determine the order quantity of a particular wooden table, classified as

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Question:

The Scottish manufacturer Lasim needs to determine the order quantity of a particular wooden table, classified as A-124. The company is currently considering the inventory control of this specialized product in its warehouse. The annual demand for this component is 4000 units. The company applies a holding cost rate of 20% per year and its fixed order costs are 50€ (including transport costs).

Over the past years, the company has followed different replenishment order policies. The replenishment order quantities applied so far as well as the associated annual holding costs and annual order costs are shown in the following Table.

REPPLENISHMENTPOLICY ORDERS PER YEAR ORDER QUANTITY ORDER COST($) HOLDING COST($) TOTAL COST($)
A 2 2000 100 2500 2600
B 4 1000 200 1250 1450
C 6 667 300 833 1133

a. Calculate the Economic Order Quantity and evaluate the minimum total yearly costs that the company might achieve.

b. What is the % cost deviation from the minimum total costs for each one of the company’s replenishment order quantities? What is the % unit deviation from the Economic Order Quantity for each one of the company’s replenishment order quantities?

c. Management of Motif supports that small differences in the replenishment order quantity might have a large impact on the company’s total yearly costs. Do you agree with this statement? Justify your answer either graphically or by performing the necessary calculations.