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Topic: Control Over Material

Learning Objectives
: In this case student will be able to learn how Sensitivity of EOQ to changes in relevant ordering and carrying costs cost of prediction error.

Learning Outcomes: After going through this GDB, the learners are expected to apply their knowledge through economic order quantity to compare this cost to the annual relevant total costs that FRECH would have incurred.

Case:

FRECH Company’s annual demand for its only product, HT-025, is 10,000 units. FRECH is currently analyzing possible combinations of relevant carrying cost per unit per year and relevant ordering cost per purchase order, depending on the company’s choice of supplier and average levels of inventory. This table presents three possible combinations of carrying and ordering costs.

 Relevant Carrying Cost per Unit per Year Relevant Ordering Cost per Purchase Order Rs.10 Rs.400 Rs.20 Rs.200 Rs.40 Rs.100

Requirements:

1. For each of the relevant ordering and carrying-cost alternatives, determine (a) EOQ and (b) annual relevant total costs.

2. How does your answer to requirement 1 give insight into the impact of changes in relevant ordering and carrying costs on EOQ and annual relevant total costs? Explain briefly.

3. Suppose the relevant carrying cost per unit per year was Rs.20 and the relevant ordering cost per purchase order was Rs.200. Suppose further that FRECH calculates EOQ after incorrectly estimating relevant carrying cost per unit per year to be Rs.10 and relevant ordering cost per purchase order to be Rs.400. Calculate the actual annual relevant total costs of FRECH’s EOQ decision. Compare this cost to the annual relevant total costs that FRECH would have incurred if it had correctly estimated the relevant carrying cost per unit per year of Rs.20 and the relevant ordering cost per purchase order of Rs.200 that you have already calculated in requirement 1. Calculate and comment on the cost of the prediction error.

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Views: 7527

### Replies to This Discussion

share your idea or opinion BY  samra tariq My answers are as follows...kindly share your's too...

Question 1:

EOQ:

894

447

224

Total costs:

8870

8870

8980

Question 2:

This part can be understood from the details given in lecture 9 of handouts...and then it could be answered properly.

Question 3:

EOQ=447

Total costs=8870

cost of prediction error= 0

Finally, comment on the answer you obtained (cost of prediction error)...

Kindly let me know if these answers are correct and share your ideas as well...

Regards...   Hello,

RU = annually required units (10,000)

OC = ordering cost for one order (400, 200, 100)

UC = Unit Cost ?

CC = Carrying Cost % of Unit Cost (10, 20, 40)

Question: how do you calculate the Unit Cost?

Regards,

Bro. carefully look at the data...we are already provided with carrying cost per unit per year, so we don't need to get into further details...just substitute the values directly and get the answer...

Good Luck...  Regards...   Thanks!

My pleasure...   sis u there?

mis samra,carrying cost,CC ek amount kse hoge,,mjy samj nai araha

CC is the abbreviation of carrying cost...

Regards...  wo tu carrying cost per unit ho gai....??? unit cost kaisay maloom karna ha... and as far as I think... carrying cost 50% hoti ha unit cost k ... Am i right???

req 2 or 3 explain kr dain plz :)

The last part now, calculate EOQ with carrying cost 20 and ordering cost 200...

With the procedure mentioned above, for calculating total cost, calculate total cost: the answer would be 8870...

As for cost of prediction error is concerned, I asked about it from the instructor but he did not reply...but I think it would be the difference b/w both the total costs...i.e. the one calculated with older values and now with the new values...

Ultimately, there is no difference: the answer is 0.

Then comment on the answer in your own words that how the values changed and how did the total cost got affected by it? i.e. cost of prediction error...

Hopefully, everything is clear now...InshaAllah...

Regards...   .