Inventory Problem The Hollywood Doll Company has an jannual demand of 10,oo for

Question

Inventory Problem The Hollywood Doll Company has an jannual demand of 10,oo for its Victorian style dolls. The company operates 50 weeks per year (two weeks closed for July vacation) and 5 days per week. The cost accounting department estimates, on average, that it costs 10% of the value of an item to hold it in stock for one year. This includes interest, storage cost, utilities, taxes, etc. The same accounting department estimates that it cost: 50 to make a purchase order(the total cost of the purchasing department divided by the number of purchase orders it produce last year). The company wishes to determine the most economic order quantity for the raw material that it uses to produce the dolls. The material from the supplier cost $7 per unit (for one doll) and the order lead time is 7 days. The supplier has also stated that it can send 100 doll units each day until the entire purchase order is satisfied. There are no quantity discounts.

Explanation / Answer

Annual demand= 10000

Holding cost= 10% of $7= $0.7 per unit

Ordering cost= $50

Economic order quantity= square root of ( 2*10000*50/0.7)

= 1195.22 units

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