Question

Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order, the purchase price per chip is $25, and the firm's inventory carrying costs is equal to 20% of the purchase price. (Assume a 360-day year.)

Refer to Scenario: Aberwald. If Aberwald holds a safety stock equal to a 30-day supply of chips, what is Aberwald's minimum cost of ordering and carrying inventory?

Answer 1

Particulars	Amount
Annual Demand	126000
Ordering cost	$         200.00
Carrying cost	$             5.00

Carrying Cost = Price * Carrying cost %

= $ 25 * 20%

= $ 5

EOQ = SQRT [ 2 * Annual Demand * Order cost / Carrying cost ]
= SQRT [ 2 * 126000 * 200 / 5 ]
= SQRT [ 50400000 / 5 ]
= SQRT [ 10080000 ]
= 3174.90157327751

EOQ is 3175 Units

No. of oders = Annual demand / Units per order

= 126000 / 3175

= 40 Orders

Ordering cost = No. of Orders * Order cost

= 40 * $ 200

= $ 8000

Safety stock ( 1 Month stock ) = 126000 / 12

= 10500

Avg STock = 3175 / 2

= 1588

Carrying cost = [ Safety stock + Avg STock ] * carrying cost per unit

= [ 10500+ 1588 ] * $ 5

= 12088 * $ 5

= $ 60440