Question

Thomas Kratzer is the purchasing manager for the headquarters of a large insurance company chain with a central inventory operation. Thomas's fastest-moving inventory item has a demand of 5,800 units per year. The cost of each unit is $103, and the inventory carrying cost is $9 per unit per year. The average ordering cost is $31 per order. It takes about 5 days for an order to arrive, and the demand for 1 week is 116 units. (This is a corporate operation, and the are 250 working days per year.)

A) What is the EOQ?
B) what are the annual holding costs?

C) what are the annual ordering costs?

d)what is the reorder point?

e)What is the annual cost of ordering and holding​ inventory?

f) What is the total annual inventory​ cost, including the cost of the 5800 units?

​

Answer 1

a) EOQ(Economic Order Quantity) = sqroot{(2*Annual Demand*order cost per order)/(Holding cost per unit)}

= sqroot{(2*5880*31)/(9)}

= 221.26 Approximately

B) Annual Inventory Holding cost = Average Inventory*Holding cost per unit

= (221.26/2)*9

= $995.67

C) total Ordering cost = Number of orders*Ordering cost per order

= (5800/221.26)*31

= $812.62

d) Reorder Point = Average Daily Unit Sales*Delivery Lead time

= (5800/250)*5

= 116 Units

e) Total Annual Cost = Annual Inventory Holding Cost + Cost of ordering

= $995.67 + $812.62

= 1808.29

F) purchasing Cost = Total Demand * cost of each unit

= $597400

Total cost = $1808.29 + $597400

= $599208.29