Question

Given the following information, formulate an inventory management system. The item is demanded 50 weeks a year.

Item cost	$	7.00		Standard deviation of weekly demand	20	per week
Order cost	$	243.00		Lead time	1	week(s)
Annual holding cost (%)		32	% of item cost	Service probability	95	%
Annual demand		22,100
Average demand		442	per week

a. Determine the order quantity and reorder point. (Use Excel’s NORMSINV( ) function to find your z-value and then round that z-value to 2 decimal places. Do not round any other intermediate calculations. Round your final answers to the nearest whole number.)

b. Determine the annual holding and order costs. (Do not round any intermediate calculations. Round your final answers to 2 decimal places.)

c. Assume a price break of $50 per order was offered for purchase quantities of 2,200 units per order. If you took advantage of this price break, how much would you save annually? (Do not round any intermediate calculations (including number of setups per year). Round your final answer to 2 decimal places.)

Answer 1

a) and b)

c)

When purchase quantity = 2200 units, order cost = 243-50 = $193

Annual ordering cost =( Annual demand/order quantity)* order cost = (22100/2200)*193 = $1938.77

Anmual holding cost = (Order quantity/2) *holding cost = (2200/2)*2.24 = $2464

Total cost = 1938.77+2464 = 4402.77

Annual savings = 4904.99-4402.77 = $ 502.22