A firm uses an inventory item with the following characteristics. $6.00 1,000 $3

ID: 2612227 • Letter: A

Question

A firm uses an inventory item with the following characteristics.

$6.00

1,000

$30.00

25%

How many times should the product be reordered each year and what are the related carrying costs and ordering cost?

a. 5 Reorders, $150 Carrying Costs, $150 Ordering Costs

b. 3.3 Reorders, $150 Carry Costs, $150 Ordering Costs

c. 5 Reorders, $300 Carry Costs, $150 Ordering Costs

d. 3.3 Reorders, $300 Carry Costs, $300 Ordering Costs

Cost per-item

$6.00

Annual consumption

1,000

Fixed cost per order placed

$30.00

Carrying cost of inventory (as a % of dollar value)

25%

Calculation of Economic Order Quantity:

EOQ = SQRT(2 × Quantity × Cost Per Order / Carrying Cost Per Order)

EOQ = SQRT(2 × 1,000 × 30 / 1.50)

EOQ = 200 Units

Reorder = 1,000 / 200 = 5

Carrying Cost = 200 / 2 = 100 x 6 = 600 x 25% = 150

So,the correct option is a. 5 Reorders, $150 Carrying Costs, $150 Ordering Costs

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