# Question

Through its online accessory store, Gateway sells its own products, as well as products made by other companies.

One of these products is the Viewsonic VX150 LCD monitor:

Estimated annual

demand:............... 15,376 monitors (50 weeks per year)

Cost: ............... $640 per monitor

Lead time: ............. 2 weeks

Standard deviation of

weekly demand: ........... 16 monitors

Standard deviation of lead

time: ................. 0.3 weeks

Holding cost per unit per

year: ............... 40% of item cost

Ordering cost: $25 per order

Desired service level: ........ 95% (z = 1.65)

a. What is the economic order quantity for the moni tor? Calculate annual ordering costs and holding costs (ignoring safety stock) for the EOQ.

b. What is the reorder point for the monitor? How much of the reorder point consists of safety stock?

c. Suppose Gateway decides to order 64 monitors at a time. What would its yearly ordering and holding costs (ignoring safety stock) for the monitor be?

d. Because computer technologies become obsolete so quickly, Gateway is thinking about raising holding costs from 40% of item cost to some higher percentage.

What will be the impact on the economic order quantity for monitors? Explain why.

For parts e and f, use the following formula to consider the impact of safety stock (SS) on average inventory levels and annual holding costs:

e. What is the annual cost of holding inventory, including the safety stock? How much of this cost is due to the safety stock?

f. Suppose Gateway is able to cut the lead time to a constant 1 week. What would the new safety stock level be? How much would this reduce annual holding costs?

One of these products is the Viewsonic VX150 LCD monitor:

Estimated annual

demand:............... 15,376 monitors (50 weeks per year)

Cost: ............... $640 per monitor

Lead time: ............. 2 weeks

Standard deviation of

weekly demand: ........... 16 monitors

Standard deviation of lead

time: ................. 0.3 weeks

Holding cost per unit per

year: ............... 40% of item cost

Ordering cost: $25 per order

Desired service level: ........ 95% (z = 1.65)

a. What is the economic order quantity for the moni tor? Calculate annual ordering costs and holding costs (ignoring safety stock) for the EOQ.

b. What is the reorder point for the monitor? How much of the reorder point consists of safety stock?

c. Suppose Gateway decides to order 64 monitors at a time. What would its yearly ordering and holding costs (ignoring safety stock) for the monitor be?

d. Because computer technologies become obsolete so quickly, Gateway is thinking about raising holding costs from 40% of item cost to some higher percentage.

What will be the impact on the economic order quantity for monitors? Explain why.

For parts e and f, use the following formula to consider the impact of safety stock (SS) on average inventory levels and annual holding costs:

e. What is the annual cost of holding inventory, including the safety stock? How much of this cost is due to the safety stock?

f. Suppose Gateway is able to cut the lead time to a constant 1 week. What would the new safety stock level be? How much would this reduce annual holding costs?

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