Economic ordering quantity, reorder point, and safety stock Chen Enterprises wis

Question

Economic ordering quantity, reorder point, and safety stock

Chen Enterprises wishes to determine the economic order quantity for a critical and expensive inventory item that it uses in large amounts at a relatively constant rate throughout the year. The firm uses 450,000 units of the item annually and has order costs of $375 per order; its carrying costs associated with this item are $28 per unit per year. The firm plans to hold safety stock of the item equal to five days of usage, and it estimates that 12 days are needed to receive an order for the item once placed. Assume a 365-day year.

(a)Calculate the firm’s EOQ for the item of inventory described.

(b)What is the firm’s total cost based upon the EOQ calculated in part (a)?

(c)How many units of safety stock should Chen hold?

(d)What is the firm’s reorder point for the item of inventory being evaluated?

Explanation / Answer

a) item annually required=D=450,000

cost per order=c=375

annual carrying costs /unit=h=28

EOQ for the item of inventory described=(2D*c/h)1/2 = (2*450,000*375/28)1/2 =3471.83=3472

b) the firm’s total cost based upon the EOQ=3472

=Purchase cost+Ordering cost+holding cost

=item annually required*Purchase price+(Dc/EOQ)+h*( EOQ/2)

=450,000 *Purchase price+(450,000*375/3472)+28*( 3472/2)

put all the above values but purchase price per unit is not given in the question.

=450,000 *Purchase price+97211.11

c) safety stock should Chen hold=5*(450,000/365)=6164.38=6164

d)Inventory required during lead time=12*(450,000/365)=14794.5=14795

firm’s reorder point=Inventory required during lead time+safety stock=6164+14795=20959

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