Exercise Solution

Gentle Electric Company

Name: Uzoigwe kelechi_jennifer
Objective: To decide the ordering policy at Gentle electric for transformers used in the
production of control units for passenger and freight elevators.
Analysis: With the information compiled my Mr. Edison we can calculate the total inventory
cost for gentle electric. The total annual cost equation can be written as below.
Annual Total Cost = Material cost + Ordering cost + Inventory Carrying cost + Transportation
cost + Unloading cost + Additional warehouse space cost (when required)
Please provide your logic/formula used to calculate the following cost components.
Material Cost:total fixed costs +total cost \total unit produced
Ordering Cost:fixed cost*requisitions per number of orders in a year *cost of each order
Inventory Holding cost:
This is calculated as a fraction of the inventory investment x the average inventory, The holding
cost will be H = I x Cu x (Q/2) where:
Q is the order quantity under consideration. Given that you do not have information about the
lead time and the demand, assume a constant rate of depletion for the inventory thus the average
inventory will be Q/2.
I is the fraction of the inventory investment representing the holding cost.
Cu is the cost per unit.
Transportation cost: full load *per car load+LCL units*shipping cost per unit =(per mile cost
*weight per unit*distance)
Additional warehouse space cost: total volume ordered +cost per unit of order
Unloading cost: fixed cost *cost per unit *cost of loading*quantity sent +quantity received

Based on the analysis the recommended order quantity 600000 units, which implies 4.0
requisitions per year and the total estimated cost of following this recommended order
policy is $ 638550.00.

Exercise Solution

Exercise Solution
Appendix:
Please insert a copy of the table from excel and a graph of the final cost behavior as it changes with order Quantity.