Question

The demand for electrical components is fixed at a rate of 2400 units/month.Each time the store makes an order ot costs 320$.The item costs $3.the annual inventory holding cost rate is 20%. Q*=5543 units, T8=2.3 months.

Explanation: Periodic rderis calculated on the annual demand basis. Annual demand D=2400 *12units/year. The order cost K is $320 and now we need ‘h’ which is holding cost per unit. As we have $3 per unit cost the annual holding rate is 0.2 of it, which is 0.2*3= $0.6 /per unit holding cost in $. Then we have the EOQ= sqrt(2*2400*12*320 /0.6)=5543 units/order. With K=320, h=$0.6 we have Toptimal (in years) = sqrt(2*320/(0.6*2400*12))=0.19yr=2.3 months- every 2.3 months the inventory is to be replenished by 5543 units.

So, components are stored in inventory for 2.3 months before they are fully sold. The inventory turns ( annually) in such case is1/ 0.19 ( year)=5.26

Let’s increase the inventory annual holding cost rate from 20% to 30%, all else being the same How would that reflect on the EOQ value, optimal period and inventory turns#?

Note for help: consistency matters- if the inventory holding cost rate is given as annual, the demand D also has to be given as annual.

Answer 1

Formula sheet

A1	B	C	D	E	F	G	H
2
3		Economic order quantity (EOQ) is the order quantity at which total cost of inventory management is minimum.
4		EOQ is given by following equation:
5
6
7
8
9		Using the following data:
10		Flow rate	=Demand per year	=2400*12
11		Setup Cost	=Ordering cost	320
12
13		Annual holding cost rate		0.25
14		Price per pair of boot		3
15		Holding cost per year per unit	=Price for inventory purchase*Annual holding cost.
16			=E14*E13	=E14*E13
17
18		Now EOQ can be calcaculated using the above data is
19
20
21
22
23
24
25
26
27		Hence EOQ is	=SQRT(2*E11*E10/D16)	=SQRT(2*E11*E10/D16)
28
29		Expected Number of Orders Per Year	=Demand / EOQ
30			=E10/D27	=E10/D27
31
32		Optimal time between two Orders in Years	=1/ Expected Number of orders per year
33			=1/D30	=1/D30
34
35		Inventory turns	=1/Optimal time between two orders
36			=1/D33	=1/D33
37
38		Hence,
39		Optimal time	=D33	Years
40		Inventory turns	=D36
41