Joanie Fabrics makes custom purses and uses 800 yards of fabric per year. The fa

Question

Joanie Fabrics makes custom purses and uses 800 yards of fabric per year. The fabric used for the purses has a fixed cost of $50 per order, a carrying cost of $2 per yard per year. When they place an order, it takes 5 days before the shipment is received. Joanie likes to keep 10 days’ usage in inventory as her safety stock because her customers would be very upset if she runs out of their favorite purses. a. What is the EOQ? b. What is the average level of inventory? (365 day year) c. What is the reorder point?

Explanation / Answer

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

=SQRT (2*800*50/2)

=200

c. Reorder Point = Lead Time in Days × Daily Average Usage + Safety Stock

= 5*800/365 + 800/365*10

= 5 * 2.19 + 21.9

= 131.4

b.Average stock level = Minimum level + 1/2 x Re-order quantity

=800/365*10 + 1/2*131.4

=21.9 + 65.7

= 87.6

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