EAR

7 Key excerpts on "EAR"

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  eBook - PDF

  Cost Management

  • Don Hansen, Maryanne Mowen, Dan Heitger, , Don Hansen, Maryanne Mowen, Dan Heitger(Authors)
  • 2021(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Why: Inventory cost is defined as the sum of ordering cost (or setup cost) plus carrying cost. The quantity ordered (or produced) determines the inventory cost. The quantity that minimizes total inventory cost is called the economic order quantity (EOQ). Copyright 2022 Cengage LEARning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall lEARning experience. Cengage LEARning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 1024 Chapter 20 Inventory Management: Economic Order Quantity, JIT, and the Theory of Constraints When to Order or Produce Not only must we know how much to order (or produce), but also we must know when to place an order (or to set up for production). Avoiding stock-out costs is a key element in determining when to place an order. The reorder point is the point in time when a new order should be placed (or setup started). It is a function of the EOQ, the lead time, and the rate at which inventory is depleted. It is expressed in level of inventory; that is, when the inventory of a part reaches a certain level, it triggers the placement of a new order. Lead time is the time required to receive the economic order quantity once an order is placed or a setup is initiated. To avoid stock-out costs and to minimize carrying costs, an order should be placed so that it arrives just as the last item in inventory is used. Knowing the rate of usage and lead time allows us to compute the reorder point that accomplishes these objectives: Reorder point 5 Rate of usage 3 Lead time (20.3) If the demand for the part or product is not known with certainty, the possibility of stock-out exists. To avoid this problem, organizations often choose to carry safety stock.

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  eBook - PDF

  Cost Management

  Measuring, Monitoring, and Motivating Performance

  • Leslie G. Eldenburg, Susan K. Wolcott, Liang-Hsuan Chen, Gail Cook(Authors)
  • 2016(Publication Date)
  • Wiley

    (Publisher)

  ■ Economic Order Quantity The economic order quantity is the minimum point on the total cost curve. This is the order quantity (or re-order quantity) that will minimize the combined ordering costs and carrying costs. To determine this order quantity, you take the first derivative (remember, from calculus) of the total cost equation above and set it to zero. Fortunately, the economic order quantity model has been around for a long time and you will not need to remember your calculus. The equation is: Q A K H EOQ (2 )/ = = × × T o c f LO 2 Calculate economic order quantity. example DmitrijsMihejevs/Shutterstock DmitrijsMihejevs/Shutterstock Economic Order Quantity C H A P T E R 1 6 705 Applying this model to TimePiece Ltd. will show managers the most cost effective order quantity. Based on the information above: Q A K H Q Q Q EOQ 2 EOQ 2 20,000 gEARs $75 per order $12 per gEAR EOQ $3,000,000 $12 EOQ 500 × × × × = = = = = = = = This result tells managers that it would be more cost effective to place orders of 500 gEARs instead of 1,000 gEARs. Substituting 500 gEARs into the total cost equation, TimePiece Ltd. will now incur costs of $6,000; $1,500 less than the current situation. The economic order quantity may be used to determine the quantity of products to order, the quantity of raw materials to order, the length of a production run, or the number of prototypes to make during product development and testing. This basic model does not consider special circumstances like quantity discounts or the timing of placing an order. Assumptions Similar to all equations used to support business decision-making, the economic order quantity has a number of underlying assumptions. This model assumes that managers know annual demand for inventory with certainty. It is unusual that managers know this demand with absolute certainty although some industries are more stable than others.

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  eBook - PDF

  Quantitative Methods for Business

  • David Anderson, Dennis Sweeney, Thomas Williams, Jeffrey Camm(Authors)
  • 2015(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  (The inventory system described was originally implemented in the CVS stores formerly known as SupeRX.) Copyright 2016 Cengage LEARning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall lEARning experience. Cengage LEARning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 14.1 Economic Order Quantity (EOQ) Model 633 14.1 Economic Order Quantity (EOQ) Model The economic order quantity (EOQ) model is applicable when the demand for an item shows a constant, or nEARly constant, rate and when the entire quantity ordered arrives in inventory at one point in time. The constant demand rate assumption means that the same number of units is taken from inventory each period of time such as 5 units every day, 25 units every week, 100 units every four-week period, and so on. To illustrate the EOQ model, let us consider the situation faced by the R&B Beverage Company. R&B Beverage is a distributor of beer, wine, and soft drink products. From a main warehouse located in Columbus, Ohio, R&B supplies nEARly 1000 retail stores with beverage products. The beer inventory, which constitutes about 40% of the company’s total inventory, averages approximately 50,000 cases. With an average cost per case of approxi- mately $8, R&B estimates the value of its beer inventory to be $400,000. The warehouse manager decided to conduct a detailed study of the inventory costs associated with Bub Beer, the number-one-selling R&B beer. The purpose of the study is to establish the how-much-to-order and the when-to-order decisions for Bub Beer that will result in the lowest possible total cost.

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  Operations and Production Systems with Multiple Objectives

  • Behnam Malakooti(Author)
  • 2013(Publication Date)
  • Wiley-Interscience

    (Publisher)

  6.2 ECONOMIC ORDER QUANTITY 6.2.1 Basic EOQ Model The EOQ model is a widely used method for determining the order quantity to minimize total inventory cost. Despite the restrictions and simplifications of the EOQ model, it provides a good solution for minimizing total inventory cost. The EOQ method is based on the following assumptions, which significantly simplify the model: Demand rate is known and constant. Ordered items are delivered in one batch (all will be available at the same time). There are no quantity discounts. That is, the cost per unit of items is the same regardless of the quantity of items. Lead time (defined as the duration between the order placement time and the arrival time) is known and constant. T Time Q T R op Q avg L L D Rate T L T L I D Rate D Rate D Rate Figure 6.3 EOQ model: inventory versus time where Q , R op , and L are constant. 318 INVENTORY PLANNING AND CONTROL Orders, setups, and holding costs are constant and known with certainty. Shortage is not allowed. The following notations are used in the EOQ model: R op = reorder point, minimum inventory amount at which an order is placed for the future period L = lead time, length of time between an order placement and its arrival T = duration of each cycle Q = economic order quantity D = demand of units per period (e.g., yEAR) S s = safety stock Figure 6.3 presents a typical inventory planning based on the EOQ model. Since the demand rate and lead time L are constant, the reorder point R op can be calculated directly regardless of the value of the order quantity Q . The average quantity is Q avg = Q /2. Cycle period T is represented by a ←→ line. When the inventory level reaches the reorder point R op , the order is placed, where it takes L duration when inventory level would have reached zero. Right when the inventory reaches zero, the order arrives. The problem is to find the optimal quantity Q ∗ that minimizes the total inventory cost.

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  Cornerstones of Cost Management

  • Don Hansen, Maryanne Mowen(Authors)
  • 2017(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Assuming average inventory to be Q /2 is equivalent to assuming that inventory is consumed uniformly. Equation 20.1 can be used to calculate the total inventory cost for any Q . However, the objective of inventory management is to identify the order quantity (or lot size) that minimizes this total cost ( TC ). Thus, the decision variable is the order quantity (or lot size). This quantity that minimizes the total cost is called the economic order quantity (EOQ) and is derived by taking the fi rst derivative of Equation 20.1 with respect to Q and solving for Q : 2 Q ¼ EOQ ¼ ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi ð 2 DP = C Þ p ð 20 : 2 Þ Cornerstone 20.1 illustrates both EOQ and the inventory cost equation. Ultrashock/Shutterstock.com 20.1 The HOW and WHY of Calculating the EOQ Information: Mantener Corporation does warranty work for a major producer of DVD players. The following values apply for a part used in the repair of the DVD players (the part is purchased from external suppliers): D ¼ 25,000 units Q ¼ 500 units P ¼ $40 per order C ¼ $2 per unit 2 d TC ð Þ = dQ ¼ C = 2 DP = Q 2 ¼ 0; thus, Q 2 ¼ 2 DP = C and Q ¼ ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 2 DP = C p . 1048 Chapter 20 Inventory Management: Economic Order Quantity, JIT, and the Theory of Constraints Why: Inventory cost is de fi ned as the sum of ordering cost (or setup cost) plus carrying cost. The quantity ordered (or produced) determines the inventory cost. The quantity that minimizes total inventory cost is called the economic order quantity (EOQ). Required: 1. For Mantener, calculate the ordering cost, the carrying cost, and the total cost associated with an order size of 500 units. 2. Calculate the EOQ and its associated ordering cost, carrying cost, and total cost. Compare and comment on the EOQ relative to the current order quantity.

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  eBook - ePub

  Foundations and Applications of the Time Value of Money

  • Pamela Peterson Drake, Frank J. Fabozzi(Authors)
  • 2009(Publication Date)
  • Wiley

    (Publisher)

  Let’s look at how the EAR is affected by the compounding. Suppose that the Safe Savings and Loan promises to pay 6% interest on accounts, compounded annually. Because interest is paid once, at the end of the yEAR, the effective annual return, EAR, is 6%. If the 6% interest is paid on a semiannual basis—3% every six months—the effective annual return is larger than 6% because interest is EARned on the 3% interest EARned at the end of the first six months. In this case, to calculate the EAR, the interest rate per compounding period—six months—is 0.03 (that is, 0.06 ÷ 2) and the number of compounding periods in an annual period is 2:

  EAR = (1 + i )

  n

  - 1

  EAR = (1 + 0.03)2 - 1 = 1.0609 - 1 = 0.0609 or 6.09%

  Extending this example to the case of quarterly compounding with a nominal interest rate of 6% we first calculate the interest rate per period, i , and the number of compounding periods in a yEAR, n:

  i = 0.06 ÷ 4 = 0.015 per quarter

  n = 12 months ÷ 3 months = 4 quarters in a yEAR

  The EAR is

  EAR = (1 + 0.015)4 - 1 = 1.0614 - 1 = 0.0614 or 6.14%

  Let’s see how this math will help you compare investments. Suppose there are two banks: Bank A, paying 12% interest compounded semiannually, and Bank B: paying 11.9% interest compounded monthly. Which bank offers you the best return on your money? Comparing APR’s, Bank A provides the higher return. But what about compound interest? We calculate the EAR for each account as

  Bank A:

  Bank B:

  EXHIBIT 4.1

  Effective Interest Rates for 12% APR with Different Frequencies of Compounding

  Bank B offers the better return on your money, even though it advertises a lower APR. If you deposit $1,000 in Bank A for one yEAR, you will have $1,123.60 at the end of the yEAR. If you deposit $1,000 in Bank B for one yEAR, you will have $1,125.70 at the end of the yEAR, providing the better return on your savings.

  You can see the effect on the EAR of the frequency of compounding within the yEAR in Exhibit 4.1

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  Engineering Economics for Aviation and Aerospace

  • Bijan Vasigh, Javad Gorjidooz(Authors)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  In the past two chapters, the interest was compounded annually, but for the majority of projects evaluated by professional engineers in aviation, aerospace, and financial institutions, the interest is compounded more frequently than once a yEAR. In other words, interest may be compounded semi-annually, quarterly, monthly, daily, and potentially continuously. The effective interest rate, or annual equivalent rate (AER), is the actual rate of interest EARned or paid. If interest is given per yEAR (stated interest rate or nominal rate) but compounded more frequently than once a yEAR, then effective interest rate per yEAR is different and it is greater than the nominal interest rate per yEAR. Every nominal interest rate must be converted into an effective rate before it can be used for financial decision-making purposes. Each type of interest rate must be analyzed in order to solve various cases where interests are expressed in different manners.

  In the U.S., 12 million people borrow nEARly $50 billion a yEAR through payday loans. The rates charged on payday loans can be up to 35 times those charged on credit card loans and 80 times the rates charged on home mortgages and auto loans. The estimated annual percentage rate on payday loans in the U.S. ranges from a low of 196% to a high of 574%.

  Business Insider

  For the airlines industry, the single largest capital expenditure is the cost of aircraft. Therefore, many airline companies use either commercial bank loans or leasing companies to finance their capital needs. In 2015, airlines and leasing companies took deliveries of Boeing commercial aircraft worth approximately $122 billion. With the strong increase in demand for new and fuel-efficient commercial aircraft for the foreseeable future, the aircraft finance markets play an important role in offering a broad and balanced range of financing options at competitive prices to support the airline industry.

  Airlines pay explicit interest on commercial loans and implicit interest rates on the leasing arrangement. Although the interest rates on commercial loans and lease agreements are coded in annual percentage rates, the loan and lease payments are often made more frequently than annual bases. Therefore, the effective interest rates are higher than the stated interest rates on the loans and lease agreements. The following section presents the computation of the effective interest rates.

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