Question

5. 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 8,000 units per year. The cost of each unit is $200, and the inventory carrying cost is $10 per unit per year. The average ordering cost is $60 per order. It takes about 5 days for an order to arrive, and the demand for 1 week is 140 units. (This is a corporate operation, and there are 250 working days in a year).

e) What is the ROP?

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

g) What is the annual inventory cost including the cost of the 8,000 units?

Answer 1

F. Annual cost of ordering = (D/Q)S = (8000/309.84) * 60 = $ 1549.19

Annual cost of holding = (Q/2)H = (309.84/2) * 10 = $1549.19

G. Total annual inventory cost = Purchase cost +Annual holding cost + annual cost of ordering

= 1549.19 + 1549.19 + (8000 * 200) = $ 1603098.387

ROP can't be calculated as service level is not mentioned.