Question

In: Operations Management

What is the inventory carrying cost per unit per year for this item?

For a certain item, the cost-minimizing order quantity obtained with the basic EOQ model is 200 units, and the total annual inventory (carrying and setup) cost is $600. What is the inventory carrying cost per unit per year for this item?

 

Solutions

Expert Solution

For the EOQ model,

Total Annual inventory carrying cost = total annual setup or ordering cost.

So Annual inventory carrying cost = 1/2 * (total annual inventory) = 600/2 = 300.

Average Inventory (Cycle Stock) = EOQ/2 = 200/2 = 100.

Inventory carrying cost per unit per year = 300 / 100 = $ 3 per unit per year.

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