The Central Valve Company sells industrial valves and fluid control devices. One

Question

The Central Valve Company sells industrial valves and fluid control devices. One of Central's most popular valves is the Western, which has an annual demand of 7500 units. The price of each valve is dollar 72, and the inventory carrying cost is dollar 3 per unit per year. A study of the costs involved in placing an order for any of the valves that Central stocks concluded that the ordering cost is dollar 200 per order. What is the average inventory if the economic order quantity is used? Specify only the amount, e.g. 400 and remember to first compute the EOQ and then determine the average inventory. Answer:

Explanation / Answer

EOQ = Square Root ((2 x Annual Demand x Order Cost) / Holding Cost)

= Square Root ((2 x 7500 x 200) / 3)= 1000

Average Inventory = (1000/ 2) x $72

= 36000

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