Question

Stylez Corp. has a monthly demand of 2,000 units for a product. The product is used at a constant rate over the 365 days. The annual holding cost for the product is estimated to be $4.00 per unit and the cost of placing each order is $150.00. Current order quantity ( lot size) is 1000 units.

1) What is the total annual inventory cost for Stylez Corp, if it orders as per EOQ?

2) What is the extra cost, if any, is Stylez Corp. incurring by using a lot size of 1000 units instead of EOQ?

3) If Stylez Corp. orders as per EOQ, how many orders will be placed annually?

4)If Stylez Corp. order as per EOQ, the time between orders ( order cycle time) is :

Answer 1

Monthly demand = 2000 units

Annual demand (D) = Monthly demand × number of months per year = 2000 × 12 = 24000 units

Ordering cost (S) = $150

Holding cost (H) = $4

1) EOQ = √(2DS/H) = √[(2 × 24000 × 150)/4] = √(7200000/4) = √1800000 = 1342 units

Annual ordering cost with EOQ = (D/EOQ)S = (24000/1342)150 = $2682.56

Annual holding cost with EOQ = (EOQ/2)H = (1342/2)4 = $2684

Total annual cost with EOQ = Annual ordering cost + Annual holding cost = $2682.56 + $2684 = $5366.56 or rounded to $5367

2) with the current order quantity (Q) = 1000 units

Annual holding cost = (Q/2)H = (1000/2)4 = $2000

Annual ordering cost = (D/Q)S = (24000/1000)150 = $3600

Total annual cost with current policy = Annual ordering cost + Annual holding cost = $3600 + $2000 = $5600

Extra cost = Total annual cost with current policy - Total annual cost with EOQ = $5600 - $5367 = $233

3) Number of orders per year = D/EOQ = 24000/1342 = 17.88 or rounded to 18

4) Time between orders = (EOQ/D) Number of days per year = (1342/24000)365 = 20.41 or rounded to 20 days