Problem 2 - For supply item ABC, Andrews Company has been ordering 125 units bas

Question

Problem 2 - For supply item ABC, Andrews Company has been ordering 125 units based on the recommendation of the salesperson who calls on the company monthly. A new purchasing agent has been hired by the company who wants to start using the economic-order-quantity method and its supporting decision elements. She has gathered the following information:

Annual demand in units


250

Days used per year


250

Lead time, in days


10

Ordering costs


$100

Annual unit carrying costs


$20

Determine the EOQ, average inventory, orders per year, average daily demand, reorder point, annual ordering costs, and annual carrying costs (17 points).

Explanation / Answer

EOQ = square root of (2*demand for the year*cost to place a single order/cost to hold one unit inventory for a year) = square root of (2*250*100/20) = 50 units average inventory = EOQ/2 = 50/2 = 25 units orders per year = 250 units /50 units per order = 5 orders average daily demand = 250 units/250 days = 1 unit per day reorder point = 10 days *1 unit per day = 10 annual ordering costs 5 orders*$100 = $500 annual carrying costs 25 average units*$20 = $500

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