Question

1. The following inventory data have been established for the Thompson Company:
   1. Annual sales are 338,000 units and orders must be placed in multiples of 100 units.
   2. The purchase price per unit is KES 600 and carrying cost is 20% of the purchase price of goods.
   3. Fixed order cost is KES 4,800.
   4. Three days are required for delivery while one year has 300 working days.

Required:

1. How many orders should Thompson Company place each year?
2. At what inventory level should an order be made?
3. Calculate the total cost of ordering and carrying inventories if the order quantity is EOQ.

Answer 1

(i) Annual Demand = D = 338000/year
Ordering Cost = Co = $4800
Holding Cost = Cc = $120
Economic Order Quantity Q* = √(2DCo/Cc) = √(2*338000*4800*/120) = 5200
Number of Orders = D/Q* = 338000/5200 = 65

(ii) Reorder Point = dL,
where d = daily demand = 338000/300
L = lead time = . 3 days
Hence, Reorder point = (338000/300)*3 = 3380

(iii) Inventory Holding cost = average inventory * unit carrying cost = (Q*/2)*Cc = (5200/2)*120 = $312,000
Order cost = Number of orders * cost/order = (D/Q*)*Co = (338000/5200)*4800 = $312,000
Total Cost = Annual Inventory Holding Cost + Annual Order Cost = 312000 + 312000 = $624,000