Question

Imtiaz Super Storesells Blue Band Margarines. Its annual demand is 108,500 units. The shop incurs ordering cost of Rs650/= order, irrespective of the order size. They buy it at Rs150 per unit. The carrying cost is 12% on average inventory investment plus rent, insurance, property tax, and supervision for each unit is Rs3. The maximum sale per day is360units. It takes 5days to receivethese items from supplierafter placement of order quantities. The annual working days of Store are350 days.

Required:                                                                                                            

i). Determine the Economic order quantities (EOQ)

ii). Determine Safety stock maximum.

iii). Determine Reorder point levels

iv). Total annual inventory cost (Total annual ordering cost and total annual carrying cost)

v). A Supplier offers 1% discount to Imtiaz Supper Store, if they purchase the goods at leastat 10,000 units at a time instead of above EOQ level (Part-i). Should they accept this offer? Please advice to management with relevant comparative workings.

vi). Why Economic order quantities may be wrong some time for any particular item to purchase in a given situation?

Answer 1

Imtiaz Super Storesells Blue Band Margarines. Its annual demand is 108,500 units. The shop incurs ordering cost of Rs650/= order, irrespective of the order size. They buy it at Rs150 per unit. The carrying cost is 12% on average inventory investment plus rent, insurance, property tax, and supervision for each unit is Rs3. The maximum sale per day is360units. It takes 5days to receive these items from supplier after placement of order quantities. The annual working days of Store are350 days.

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i) . Determine the Economic order quantities (EOQ)

.

EOQ = root off ( (2 * D * S ) / C)

Where,

D = Annual demand = 108500 units\

S = cost per order = 650

C = carrying cost = cost per units * 12% = 150 * 12% = 18

.

EOQ = root off ( ( 2 * 108500 * 650 ) / 18 )

EOQ = root off (141050000 / 18 )

EOQ = root off 7836111.11

EOQ = 2800 units

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ii) . Determine Safety stock maximum.

.

Safety stock = (Maximum daily usage * Maximum lead time in days) – (Average daily usage * Average lead time in days).

Where,

Maximum daily usage = 360 units

Maximum and Average lead time in days = 5 days

Average daily usage = total demand / number of total working days = 108500 / 350 = 310 units

Safety stock = ( 360 * 5 ) - ( 310 * 5 ) = 250 units

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iii) . Determine Reorder point levels

.

Reorder Point = (Average Daily Usage x Average Lead Time in Days) + Safety Stock

.

Where,

Average Daily Usage = 310 units

Average Lead Time in Days = 5 days

Safety Stock = 250 units

.

Reorder Point = ( 310 * 5 + 250 ) = 1800 units

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iv) . Total annual inventory cost (Total annual ordering cost and total annual carrying cost)

.

Total annual inventory cost = Total annual ordering cost + total annual carrying cost

Where,

Ordering cost = 650/= order

Number of order = annual demand / EOQ = 108500 / 2800 = 39 order

Total annual ordering cost = 650 * 39 = 25350

total annual carrying cost = carrying cost per units * annual demand

carrying cost per units = ( 150 * 12%) + 3 = 21

total annual carrying cost = 21 * 108500 = 2278500

.

Total annual inventory cost = 25350 + 2278500 = 2300850

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