2. A local artisan uses supplies purchased from an overseas supplier. The owner

Question

2. A local artisan uses supplies purchased from an overseas supplier. The owner believes the assumptions of the EOQ model are met reasonably well. Minimization of inventory costs is her objective. Relevant data, from the files of the craft firm, are annual demand (D) 150 units, ordering cost (S) $42 per order, and holding cost (H) S4 per unit per year a. How many should she order at one time? b. How many times per year will she replenish her inventory of this material? c. What will be the total annual inventory costs associated with this material?

Explanation / Answer

Solution :

Part 1 :

EOQ = Square Root ( 2 * Demand * Ordering Cost / Holding Cost ) = Square Root ( 2 * 150 * 42 / 4 ) = 56.12

Part 2 :

Number of Orders = Demand / EOQ = 150 / 56.12 = 2.67 = 3orders

Part 3 :

Total Inventory Costs (Holding Costs) = Hodling Cost * EOQ / 2 = 4 * 56.12 / 2 = 112.25

Total Ordering Cost = Ordering Cost * Demand / EOQ = 42 * 150 / 56.12 = 112.25

Annual Inventory Cost = Holding Cost + Inventory Cost = 224.50

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