Item X is a standard item stocked in a company\'s inventory of component parts.
ID: 378337 • Letter: I
Question
Item X is a standard item stocked in a company's inventory of component parts. Each year the firm, on a random basis, uses about 2,400 of item X, which costs $25 each. Storage costs, which include insurance and cost of capital, amount to $4 per unit of average inventory. Every time an order is placed for more item X, it costs $18 a. Whenever item X is ordered, what should the order size be? (Round your answer to the nearest whole number.) Order size b. What is the annual cost for ordering item X? (Round your answer to 2 decimal places.) Ordering cost c. What is the annual cost for storing item X? (Round your answer to 2 decimal places.) Holding costExplanation / Answer
Given are following data :
Demand = D = 2400
Ordering cost = Co = $18
Annual unit Storage cost = Ch = $ 4 / unit
Thus , Economic Order Quantity ( EOQ )
= Square root ( 2 x Co x D / Ch )
= Square root ( 2 x 18 x 2400 / 4)
= 146.96 ( 147 rounded to nearest whole number )
Annual cost of ordering item X
= Ordering cost x Number of orders
= Ordering cost x Annual demand /EOQ
= 18 x 2400/147
= $ 293.87
Annual cost of storing item X
= Annual unit storage cost x Average inventory
= Ch x EOQ/2
= 4 X 147/2
= $294
ORDER SIZE = 147
ORDERING COST = $293.87
HOLDING COST = $294
ORDER SIZE = 147
ORDERING COST = $293.87
HOLDING COST = $294
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