Question

Eagle Insurance is a large insurance company chain with a central inventory operation. The company’s fastest-moving inventory item has a demand of 80,000 units per year. The cost of each unit is $200, and the inventory carrying cost is $15 per unit per year. The average ordering cost is $60 per order. It takes about 2 days for an order to arrive. This is a corporate operation, and there are 250 working days per year.

a) What is the EOQ for this item?

b) What is the average inventory level of the item if the EOQ is used?

c) What is the optimal number of orders per year?

d) What is the optimal number of days in between two consecutive orders (i.e., cycle length)?

e) What is the total annual cost of ordering and holding inventory when the EOQ is used?

f) What is the total annual cost, including cost of the items, when EOQ is used?

 

Answer 1

A.

= = 800

EOQ= 800

B.  

Average inventory level = (0 + Q)/2 = Q/2

Q*	= Optimal order quantity (i.e., the EOQ)

0+800/2 = 400

C.

Number of orders = Annual Demand/EOQ

Number of order= 80000/800 = 100

D.  

Time between two orders = EOQ/Annual Demand

Time between two orders = 800/80000= .01 Year *365 = 3.65 Days

E.  

Total Annual ordering cost= No of order * Per order cost

Total Annual ordering cost= 100 * 60 = 6000

F.

Total cost at EOQ =

80000 * 200 = 16000000

80000* 15= 1200000

Order cost= 6000

__________________

Total cost=  17206000