EOQ, reorder point, and safety stock Alexis Company uses 815 units of a product
ID: 2788942 • Letter: E
Question
EOQ, reorder point, and safety stockAlexis Company uses 815 units of a product per year on a continuous basis. The product has a fixed cost of $44 per order, and its carrying cost is $2 per unit per year. It takes 5 days to receive a shipment after an order is placed, and the firm wishes to hold 10 days' usage in inventory as a safety stock.
a.Calculate the EOQ.
b.Determine 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 cost, (2) carrying cost, (3) total inventory cost, (4) reorder point, (5) economic order quantity.
Round all answers to the nearest whole number
Explanation / Answer
Ordering cost (O) = $ 44 per order
Demand in units per year (D)= 815 Units
Carrying cost per unit per year (C )= $ 2 per unit per year
Re-ordering period(lead time in days ) = 5 days
Safety Stock = 10 days usage =815/365*10= 22.33 or 23 units
Daily average demand= 815/365= 2.23
=((2 × F × D)/C)(1/2)
= ((2 x44 x 815)/2)(1/2)
= 189.37 units
= 190 units
2. Average Level of inventory : ((0+190)/2)
= 95 Units
3. Re order Point= Lead Time in Days x Daily average usage + Safety stock
= 5*2.23+23
= 34.15 or 35 units
4. If the the firm does not hold safety stock then the re ordering point will change . because while computing re order point we add the safety stock to the re ordering consumption calculation . Rest all the variables no impact on the safety stock.
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