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 5,750 units per year. The cost of each unit is $101, and the inventory carrying cost is $8 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 115 units. (This is a corporate operation, and the are 250 working days per year.)

A) What is the EOQ?
B) What is the average inventory 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 any two orders?
E) What is the annual cost of ordering and holding inventory?
F) What is the total annual inventory cost, including cost of the 5,750 units?

Answer 1

A) EOQ(Economic Order Quantity) = sqroot{(2*Annual Demand*Ordering cost per order)/Carrying cost}

EOQ = sqroot{(2*5750*31)/8}

= 211 Approximately

B) Average Inventory = EOQ/2

= 211/2

= 105.5

C) Number of order per year = Annual Demand/EOQ

= 5750/211

= 27.25

D) Days between orders = Total Working days/Number of orders

= 250/27.25

= 9.17

E) Annual cost of ordering = Number of orders*Ordering cost per order

= 27.25*31

= $844.75

Annual Carrying cost = Average Inventory*Carrying cost per unit

= 105.5*8

= 844

Annual cost = $844.75 + 844

= $1688.75

F) Purchase cost = Annual demand*Unit cost

= 5750*101

= $580750

Total cost = $1688.75 + $580750

= $582438.75