EOQ reorder point, and safety stock. Alexis Company uses 877 units of a product
ID: 2720768 • Letter: E
Question
EOQ reorder point, and safety stock. Alexis Company uses 877 units of a product per year on a continuous basis. The product has a fixed cost of $59 per order, and its carrying cost is $3 per unit per year. It takes 5 days to reeive a shipment after an order is placed. And the firm wishes to hold 10 days usage in inventory as a saftety stock
a. Calculate the EOQ
b. Deterine the average level of inventory. (Note: Use a 365 day year to calculate daily usage)
c. Determine the reorder point
d. indicate which of the following variables change if the firm does not hold the safety stock: 1) order post, 2) carrying cost, 3) total inventroy cost, 4) reorder point, 5) economic quantity
Explanation / Answer
EOQ = SQRT(2 × Quantity × Cost Per Order / Carrying Cost Per Order)
= SQRT ( 2* 877 * 59 / 3) = 185.729
Average Level of Inventory = EOQ/ 2 + Buffer Inventory = 186/2 + 2.4*10 = 117
Average daily usage rate = Annual Demand / 365 = 877/365 = 2.4
Number of orders made = Quantity/Economic order quantity (EOQ )= 877/ 186 =4.71=Order made in a year = 4.71time
Lead time = 5 days
The time between orders = 365/4.71 – 5 = 72.49
ReorderPoint= Lead time*Quantity = (5/365)*877 = 12.01 = 12 units
(d) Average level of Inventory = Economic Order Quantity/2 + Safety Stock If the firm does not hold the safety stock, average level of inventory will decrease
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