Tradewinds Imports is an importer of ceramics from overseas. It has arranged to

Question

Tradewinds Imports is an importer of ceramics from overseas. It has arranged to purchase a particular type of ceramic pottery from a Korean artisan. The artisan makes the pottery in 120-unit batches and will ship only that exact amount. The transportation and handling cost of a shipment is $7600 (not including the unit cost). The importer estimates its annual demand to be 1200 units. What storage and handling cost per unit does it need to achieve in order to minimize its inventory cost? Show your calculations.

Explanation / Answer

When ordered quantity = EOQ then the inventory costs are minimized.

Ordered quantity = 120 = EOQ

EOQ = (2*Ordering Cost*Demand/Carrying cost)1/2

120 = (2*7600*1200/Carrying Cost)1/2

Carrying cost per unit= 1266.66 $

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