Question

TASK-1 Using EOQ technique calculate the required items

Tim John is the purchasing manager at the headquarters of a multinational fast food chain with a central inventory operation. Tim's fastest-moving inventory item has a demand of 30 units per day. The cost of each unit is $150, and the inventory carrying cost is $5 per unit per year. The average ordering cost is $70 per order. (It is a corporate operation, and there are 300 working days per year)

1. What is the EOQ?
2. What is the average inventory if the EOQ is used?
3. What is the optimal number of orders per year?
4. What is the optimal number of days in between any two orders?
5. What is the annual cost of ordering and holding inventory?
6. What is total inventory management cost?
7. What is total materials cost
8. What is the total annual inventory cost to be recorded in accounts?

Answer 1

Given: Daily Demand d = 30 units

No. of working days N = 300 days

Annual Demand = D = d * N = 30 * 300 = 9000 units

Cost of each unit = P = $150

Carrying cost per unit per year = H = $5

Order cost = S = $70

Economic Ordering quantity = EOQ = = = 501.99 = 502 units

Average Inventory = Iavg = EOQ / 2 = 502 / 2 = 251 units

Optimal Number of orders per year = D / EOQ = 9000 / 502 = 17.92 = 18 orders per year

Optimal number of days between order = N / Optimal Number of orders per year = 300 / 18 = 16.67 days

Annual Ordering cost = Optimal Number of orders per year * S = 18 * 70= $1260

Annual Holding cost = Iavg * H = 251 * 5 = $1255

(There is minor difference between Ordering and Holding cost due to rounding off the values)

Total inventory management cost = Annual Ordering cost + Annual Holding cost = 1260 +1255 = $2515

Total materials cost = D * P = 9000 * 150 = $1,350,000

Total annual inventory cost to be recorded in accounts = Total materials cost + Total inventory management cost = 1,350,000 + 2515 = $1,352,515

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