Posted: June 11th, 2015

Decision Making Models

Decision Making Models
Part A
Company A wishes to minimize its ordering cost for computer laptops in the coming financial year. It will be established by using the Economic Order Quantity (EOQ) model. Ford W. Harris developed the model in the year 1913 (Cárdenas-Barrón, Treviño-Garz, & Wee et al. 2012). It aids companies to make a decision regarding in-depth credit analysis. The primary objective of this technique is to reduce the overall inventory, ordering costs and the holding costs (Manna, Lee, & Chaudhuri, 2013).
The order size of company A can be calculated as follows: Identifying the C (cost/unit/year). Consequently, establishing the F (fixed cost per order) and finally, identifying the D (Units Demand per Year). In this case, C = 375, F = 320, and D = 670,000. Therefore, finding the precise order size of this company, the following formula will be applied. EOQ = (2FD/C)1/2. Thus, EOQ = (2*320*670000/375)1/2. The answer to this equation is 1,069.
In other case, Company A should invest in ordering of 1,069 laptops if it will have to minimize it ordering cost in the coming year.
Part B
Company B wishes to minimize the total annual cost of its laptop sale. The company plans to use the economic production lot size model in reducing this cost. Economic production lot size refers to the quantity of units or materials regarding manufacturing goods that can be bought or attained within the cheapest unit cost range (Roy, Sana & Chaudhuri, 2013). The Economic production lot size of the company will be determined using the following formula. Q = root of {(2KD)/ F (1-x)} where Q is the quantity order, K is the ordering or setup cost; P is the production rate, D is the demand rate; x = D/P and F the holding cost. Therefore, K = $190, D = 8710,000, F = 6.5 % (0.065), P = 3750, x = 8710000/3750. In this case; Q = root of {(2*190*8710000)/0.065(1-8710000/3750). The economic production lot size becomes 4,682 units.
Thus, to minimize total annual cost, the company should invest in the sale of 4, 682 computers in the coming year.

References
Cárdenas-Barrón, L. E., Treviño-Garza, G., & Wee, H. M. (2012). A simple and better algorithm to solve the vendor managed inventory control system of multi-product multi- constraint          economic order quantity model. Expert Systems with Applications, 39(3), 3888-3895.
Manna, S. K., Lee, C. C., & Chaudhuri, K. S. (2013). An economic order quantity model for        deteriorating items with trended demand under inflation, time discounting and a trade             credit policy. International Journal of Advanced Operations Management, 5(4), 320-336.
Roy, M. D., Sana, S. S., & Chaudhuri, K. (2013). An economic production lot size model for       defective items with stochastic demand, backlogging and rework. IMA Journal of Management Mathematics, dpt001.