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Musictoday LLC Implementing a Periodic Review Inventory System Case Solution
Music Today LLC has been serious issues with respect to ordering the right amount of inventory and after the right interval in order to not only eliminate stock-outs but also to ensure low holding cost. Figures within the EOQ column suggest the recommended amount of quantity, Music Today LLC should order every time. Since, all products are delivered within the case of 25, 50, or 100; therefore, in the third column, figures are rounded off to the nearest order-able value as per the case quantity. The fourth column suggests the number of orders, Music Today LLC should make each year of Night Train’s products. For instance, NT CD should be ordered 17 times a year with each order size of 2,600 units, or 26 cases. Similarly, NT Black Toboggan Hat must be ordered 7 times per year with each order size of 825 units. Finally, the fourth and fifth column represents the total cost for a particular product if the company decides to go forward with the Economic Order Quantity.
Following questions are answered in this case study solution
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Economic Order Quantity Calculation
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Variables’ Key
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Formulae
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Calculation
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Demonstrating Difference in Total Cost Function with Change in Order Quantity
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NT CD
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NT Black Toboggan Hat
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NT Moon Buggy T-Shirt SS White
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NT farm Wheel T-Shirt
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NT Farm Wheel Rolls CD
Case Analysis for Musictoday LLC Implementing a Periodic Review Inventory System
1. Economic Order Quantity Calculation
Variables’ Key
C = Unit Production Cost
A = Annual Demand
Cp = Cost per Order
Ch = Annual Holding Cost of a Unit
P = Retail Price
TC = Total Cost
Q = Optimal Order Quantity
Formulae
Annual Holding Cost = Cost price of the product * 15%
Total cost function = (Unit Cost * Annual Demand) + ((Annual Demand * ordering cost) / EOQ) + (Holding cost * EOQ / 2)
Economic Order Quantity = SQRT ((2 * Annual Demand * Cost per order) / Cost of holding)
Number of Orders per year = Annual Demand / Economic Order Quantity
Calculation
Item Number |
Item Description |
DEMAND FOR THE YEAR 2003 |
|||
|
|
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
NTCD06 |
NT CD |
6139 |
9523 |
13332 |
15849 |
NTCH01TBBK |
NT BLACK TOBOGGAN HAT |
814 |
1327 |
1857 |
2141 |
NTCT08SXWH |
NT MOON BUGGY T-SHIRT SS WHITE |
1659 |
2731 |
3842 |
4704 |
NTCT10SXWH |
NT FARM WHEEL RINGER T-SHIRT SS WHITE |
800 |
1385 |
1782 |
2051 |
NTCD12 |
NT FARM WHEEL ROLLS CD |
3181 |
5525 |
7250 |
8478 |
NTCT26SXGT |
NT OLD SCHOOL LOGO T-SHIRT SS GRANITE |
1393 |
2408 |
3568 |
4032 |
The quarterly demand for all merchandise and CDs from the Night train band is depicted in the above table.
|
|
|
|
|
Annual Demand (A) |
Cost ($) |
Retail ($) |
Holding Cost ($) |
CP ($) |
44843 |
9.18 |
14.95 |
1.377 |
100 |
6139 |
12.23 |
29.95 |
1.8345 |
100 |
12936 |
8.75 |
24.95 |
1.3125 |
100 |
6018 |
8.75 |
24.95 |
1.3125 |
100 |
24434 |
9.18 |
14.95 |
1.377 |
100 |
11401 |
8.75 |
24.95 |
1.3125 |
100 |
Annual demand along with cost price, selling price, ordering cost, and the annual holding cost of each product is mentioned in the above table. All the above figures have been presented in the case except the annual holding cost of the product, which has been calculated.
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|
|
Annual Demand / EOQ |
|
TC min = sqrt(2 * Ch * A * Cp) + C * A |
EOQ = SQRT((2*A*Cp)/Ch) |
Case Quantity |
Nearest Value for Order as per Case Quantity |
Number of orders per year as per EOQ |
Total Cost Function |
TC min |
2552.09 |
100 |
2,600 |
17.25 |
415,173.57 |
415,172.96 |
818.10 |
25 |
825 |
7.44 |
76,580.82 |
76,580.77 |
1403.99 |
50 |
1,450 |
8.92 |
115,033.70 |
115,032.74 |
957.62 |
50 |
1,000 |
6.02 |
53,915.55 |
53,914.37 |
1883.85 |
100 |
1,900 |
12.86 |
226,898.27 |
226,898.18 |
1318.06 |
50 |
1,350 |
8.45 |
101,489.21 |
101,488.71 |
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