Question

Brooke Army Medical Center dispenses 250,000 bottles of brand name pharmaceutical annually. The optimal safety stock (which is on hand
initially) is 1,000 bottles. Each bottle costs the center $10, inventory carrying costs are 30 percent, and the cost of placing an order with its supplier is $175.
a. What is the economic order quantity?
b. What is the maximum inventory for this medication?
c. What is the center's average inventory of bottles of this medication?
d. How often must the center order (in days)?
ANSWER
Ordering costs			F	$175
Annual usage in units			S	250,000
Annual carrying costs			C	30%
Purchase price per bottle			P	$10.00
Days per year			W	360
Safety stock			SF	1,000

Answer 1

Economic Order Quantity	=(2*Annual Demand*Cost of placing 1 order/Cost of handing per unit per year)^(1/2)
Annual Demand	250,000
Cost of placing 1 order	$         175.00
Storage cost	$             3.00	10*30%
Solution to 1
Putting all these factors in EOQ formula	=(2*250000*175/3)^(1/2)
Economic Order quantity	5,401
Total No of orders	=250000/5400.61724867322	46
So total of 46 orders will be placed
Solution to 2
Safety stock		1,000
Order received		5,401
maximum inventory		6,401
Solution to 3
Average Inventory	=5400.62/2	2,701
Safety stock		1,000
Average inventory carried		3,701
Annual ordering cost	Total no of orders * order cost per unit
	=46*175	$ 8,100.93
Annual holding cost
	=3701*3	$11,101.50
Total Cost	=8100.93+11101.5	$19,202.43
Solution to 4
No of days in year	365
Lead days	0
Safety stock	1000
Average daily use=	Annual demand/No of days
Average daily use=	=250000/365
Average daily use=	685
Reorder point=	(Average daily usage rate * Lead time) + Safety stock
Reorder point=	=(685*0) + 1000
Reorder point=	1000