Question

1. Rowan has an internet company that sells chocolates. The annual demand for the Premium Truffles is 200,000. The annual holding cost per unit is $4. and the cost to place an order is $70. What is the economic order quantity?

2. A patient takes 3 special tablets per day. The order is delivered to his home 5 days after it is called in. At what point should the patient reorder?

Answer 1

Solution 1:

The Economic Order Quantity (EOQ) helps in minimizing its inventory costs by making an accurate forecast of when a new order should be placed. EOQ is calculated as:

where,

D is Annual Demand in units = 200,000

S is Order cost per purchase = $70

H is Holding cost per unit per year = $4

So, EOQ = 2645.75 units.

Solution 2:

Reorder point (ROP) defines the particular point where a business should order fresh stocks to ensure they do not go below the stock threshold. An accurate estimation of ROP ensures minimal inventory cost as well as ensures continuous operation. The formula for ROP is:

ROP = Maximum Lead Time x Maximum Daily Usage

In this case, we observe,

Maximum lead time = 5 days;

Number of special tablets to be taken per day (which is Max Daily Usage) = 3;

So, ROP = 5*3 = 15 units.