Custom Computers, Inc. assembles custom home computer systems. The heat sinks ne

Question

Custom Computers, Inc. assembles custom home computer systems. The heat sinks needed are bought for $12 each and are ordered in quantities of 1300 units. Annual demand is 5200 heat sinks, the annual inventory holding cost rate is $3 per unit, and the cost to place an order is estimated to be $50.

1.) What is the average inventory level under the economic order quantity policy?

2.)What is the number of orders placed per year under the economic order quantity policy?

3.)What is the total annual ordering cost under the economic order quantity policy?

4.)What is the total annual holding cost under the economic order quantity policy?

5.)What is the total annual cost under the economic order quantity policy?

Explanation / Answer

Annual demand ( D ) = 5200 sinks

Ordering cost ( S) = $ 50

Holding cost (H ) = $ 3

Economic order quantity (Q ) = Sqrt of ( 2DS / H )

= Sqrt of [( 2x5200x50)/3]

= Sqrt of ( 520000/3)

= 416 sinks

1) Average inventory level = Q/2 = 416/2 = 208 sinks

2)Number of orders per year = D/Q = 5200/416 = 12.5

3)Total annual ordering cost = (D/Q) S = (5200/416)50 = 12.5x50 = $625

4)Total annual holding cost = (Q/2)H = (146/2)3 = 208x3 = $624

5)Total annual cost = annual ordering cost + annual holding cost = $625+$624 = $1249

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