The Trektronics store begins each week with 460 phasers in stock. This stock is

Question

The Trektronics store begins each week with 460 phasers in stock. This stock is depleted each week and reordered. The carrying cost per phaser is $41 per year and the fixed order cost is $84.

What is the economic order quantity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

The Trektronics store begins each week with 460 phasers in stock. This stock is depleted each week and reordered. The carrying cost per phaser is $41 per year and the fixed order cost is $84.

Explanation / Answer

1. Carrying costs = Average inventory * Cost of carrying per unit
Carrying costs = (460/2)($41) = $9,430

2. Restocking cost = Fixed order cost * Number of weeks
Restocking cost = $84 * 52 weeks = $4,368
This cost is per year basis

3. Economic order quantity can be calculated as follows
EOQ = [(2T × F)/CC]1/2
EOQ = [(2 * 460 * 52 * $84) / $41]1/2 = 313.07 units

4. The company should decrease its current order quantity from 460 to EOQ units

5. Number of orders can be calculated as follows
Orders per year = Annual demand/EOQ = [460 * 52]/313.07 units = 76.40 order per year

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