Question

A wholesale store buys 500 of their most popular coffee mugs each month. The cost of ordering and receiving shipments is $12 per order. Accounting estimates annual carrying costs are $3.60. The supplier lead time is 2 operating days. The store operates 240 days per year. Each order is received from the supplier in a single delivery. There are no quantity discounts.

6. What quantity should the store order with each order?

7. How many times per year will the store order?

8. How many operating days will elapse between two consecutive orders?

9. What is the reorder point if the company wishes to carry a safety stock of 10 mugs?

10. What is the store’s minimum total annual cost of placing orders & carrying inventory?

Answer 1

Given: Monthly Demand = 500

Annual Demand = D = 500 * 12 = 6000 mugs

Ordering cost = S = $12

Annual Carrying costs = H = $3.60

Lead time = LT = 2 days

Operating days OD = 240 days

Daily Demand = d = D / OD = 6000 / 240 = 25 mugs

6. Economic Order quantity = EOQ = = = 200 mugs

7. No. of Annual Orders = N = D / EOQ = 6000 / 200 = 30 orders

8. Operating days between 2 orders = OD / N = 240 / 30 = 6 days

9. Safety stock = 10 mugs

Reorder point = d * LT + Safety Stock = 25 * 2 + 10 = 60 mugs

10. Total annual Ordering cost & inventory carrying cost = N * S + (EOQ / 2) * H = 30 * 12 + (200 / 2) * 3.6 = 360 + 360 = $720

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