Question

A company uses EOQ. Every time they place an order for widgets, they order 1,000 widgets. The cost of placing an order is $30. It cost $ 4.00 for a widget to sit in the warehouse for a year. On average, the company uses 50 widgets per day. The most widgets the company could ever use is 60. When an order is placed, it takes 4 days to receive the widgets. Annual usage is 13,000 units. Use this information to compute the following. A. Ordering Costs B. Carrying Costs C. Reorder point D. How many units of safety stock does the company need to keep on hand?

Answer 1

A. Odering costs = No of orders x Odering costs per order.

= 13 x 30

= $390

Note: No of orders = Annual usage / EOQ = 13000 / 1000 = 13 times; odering cost per order is given $ 30 .

B. Carrying cost = 1/2 x EOQ x Carrying cost per unit per annum

= 1/2 x 1000 x 4

= $2000

note: cost for widget to sit in the warehouse for a year is carrying cost per unit per annum, that is $4.

C. Reorder point = Maximum usage x maximum delivery preiod

= 60 x 4

= 240 units

Note: Here only one delivery preiod is given , so that is taken as maximum delivery preiod and also as average delivery preiod.

to calculate Reorder point we can use another formulla, i.e,

Reorder point = (Average usage x Average delivery preiod) + Safety stock

= (50 x 4) + 40

=240 units.

* safety stock = (Maximum usage x maximum delivery preiod ) - (average usage x average delivery preiod)

=(60 x 4) - (50 x 4)

= 240 - 200

=40 units

D. 40 units of safety stock the company need to keep in the hand. ( It is calculated above)