Thomas Kratzer is the purchasing manager for the headquarters of a large insuran
ID: 329413 • Letter: T
Question
Thomas Kratzer is the purchasing manager for the headquarters of a large insurance company chain with a central inventory operation. Thomas's fastest-moving inventory item has a demand of 6,050 units per year. The cost of each unit is $101, and the inventory carrying cost is $8 per unit per year. The average ordering cost is $29 per order. It takes about 5 days for an order to arrive, and the demand for 1 week is 121 units. (This is a corporate operation, and the are 250 working days per year.) A) What is the EOQ? B) What is the average inventory if the EOQ is used? C) What is the optimal number of orders per year? D) What is the optimal number of days in between any two orders? E) What is the annual cost of ordering and holding inventory? F) What is the total annual inventory cost, including cost of the 6,050 units?
Explanation / Answer
Let Q = order size
A.
Annual setup cost = no.of orders placed per year * ordering cost per order = (6050/Q) * 29
Annual holding cost = average inventory level* holding cost per unit per year = ( Order quantity/2)* holding cost per unit per year = (Q/2)*8 = 4Q
Optimal order quantity is found when annual setup cost equals annual holding cost
(6050/Q)*29 = 4Q
Q2= (6050/4)*29 = 43,862.5
Q = 209.433 = 210units approx
EOQ = 210 units
B. Average inventory level = order quantity/2 = 209.4/2 = 104.7 = 105 units approx
C. Optimal number of orders per year = demand/order quantity = 6050/209.4= 28.89 = 29 approx
D. Optimal number of days in between 2 orders = (Number of working days per year)/(optimal number of orders) = 250/28.89 = 8.65 days
E. Annual cost of ordering and holding inventory = order quantity* holding cost per unit per year = 209.4*8 = $1,675.2 = $1,675
F. Purchase cost = 6050*101 =$6,11,050
Total annual inventory cost = purchase cost+ setup cost+ holding cost = 6,11,050 + 1,675 = $6,12,725
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.