Question

The Trektronics store begins each week with 450 phasers in stock. This stock is depleted each week and reordered. The carrying cost per phaser is $41 per year and the fixed order cost is $130.

What is the total carrying cost?

What is the restocking cost?

Should Trektronics increase or decrease its order size?

Describe an optimal inventory policy for Trektronics in terms of irder size and order frequency.

Answer 1

Part 1 - Calculation of Carrying cost

Carrying cost = Average Inventory*cost of carrying per unit

Carrying cost = (450/2)*($41)

Carrying cost = $9225

Part 2 - Calculation of restocking cost

Restocking cost = Fixed order cost * Number of weeks (since the stock is depleted each week)

Restocking stock = $130*52 week in a year

= $6760

Part 3 - Policy of firm for inventory levels is not Optimal because Restocking cost and Carrying cost per year are not equal

Suggestion - Trektronics should Decrease the Order size and increase the number of orders.

Part 4 - Optimal Inventory policy

Economic order quantity (EOQ)

EOQ =

Under root of [2 * Inventory level * Ordering cost]/Carrying cost

EOQ = under root of (2*450*$130)/$41

EOQ = 53.4196 Units or 53 units

Total Carrying cost at EOQ = ($53.4196/2)*$41 = $1095

Number of reorders in a year = Inventory/EOQ

Number of reorders in a year = 450/53.4196 = 8.4239times in week

Number of Reorders in year = 8.4239*52 = 438.04 times

Hence revised/Optimal inventory policy of trektronics will be 53.4196 units or 53 Units reordering 438.04 times or 438 times in a year.

Revised calculation of restocking cost and carrying cost

Carrying cost = (53.4196/2)*$41 = $1095

Restocking cost = ($130*8.4239 times) = $1095

Since at Economic order quantity or optimal inventory policy, Carrying cost is equal to restocking cost.