Derakhshan Case The Derakhshan Division of Gilmore Co Inc. provides emerald precious stones.

Derakhshan Case

The Derakhshan Division of Gilmore Co Inc. provides emerald precious stones. The

stones should be shipped in a particular box which keeps the gem safe in shipping

and has a label so customer know how to contact for another order. Derakhshan buy

these boxes from Kohe Noor Company (supplier). For coming year Derakhshan

needs 115 of these boxes daily. The current price of this box is $30. Under the

present arrangement with the supplier, the Derekhshan must take one twelfth of its

annual need every month. This agreement was reached in order to reduce lead time

by assuring Gilmore a regular spot on the supplier's production schedule. Without

this agreement, the lead time would be about 14 weeks. No quantity discounts are

offered on these boxes; however, the supplier requires that a minimum of 500 boxes

be on an order. Derakhshan has enough space to store boxes. Derakhshan stores the

emerald stones in a separate safe storage under highly protected environment.

Associated with each shipment of boxes is ordering costs of $200, which include all

the costs. In addition, inventory carrying costs (including taxes) on all items are

considered to be 15% of the purchase price per unit per year. (Consider each week

as 5 working days).

1) What is optimal order number of boxes that should be placed in each order?

2) Determine the number of orders per year?

3) What is the optimal reorder for boxes?

4) What cost saving will Derakhshan Inc. realize if it implements an order based on

EOQ? (Hint, estimate the total cost under optimal solution and total cost under

current situation, then compare the two situations).