Question

​Sam's Cat Hotel operates 52 weeks per​ year, 6 days per​ week, and uses a continuous review inventory system. It purchases kitty litter for ​$11.00 per bag. The following information is available about these​ bags:

Demand=80 ​bags/week

Order cost=$55.00​/order

Annual holding cost=40 percent of cost

Desired ​cycle-service level=80 percent

Lead time=5 weeks ​(30 working​ days)

Standard deviation of weekly demand=15 bags

Current ​on-hand inventory is 320 ​bags, with no open orders or backorders.

a. Suppose that the weekly demand forecast of 80 bags is incorrect and actual demand averages only 55 bags per week. How much higher will total costs​ be, owing to the distorted EOQ caused by this forecast​ error?

The costs will be ​$___ higher owing to the error in EOQ. ​(Enter your response rounded to two decimal​ places.)

b. Suppose that actual demand is 50 bags but that ordering costs are cut to only $13.00 by using the internet to automate order placing. However, the buyer does not tell anyone, and the EOQ is not adjusted to reflect this reduction in S. How much higher will total costs be, compared to what they could if the EOQ were adjusted?

The costs will be $____ higher owing to the error EOQ.

Answer 1

Economic Order Quantity is the number of unit that is added to the inventory which minimize the total inventory cost. It maintain a balance between ordering costs and carrying costs.