A firm is faced with the attractive situation in which it can obtain immediate d
ID: 463162 • Letter: A
Question
A firm is faced with the attractive situation in which it can obtain immediate delivery of an item it stocks for retail sale. The firm has therefore not bothered to order the item in any systematic way. However, recently profits have been squeezed due to increasing competitive pressures, and the firm has retained a management consultant to study its inventory management. The consultant has determined that the various costs associated with making an order for the item stocked are approximately $70 per order. She has also determined that the costs of carrying the item in inventory amount to approximately $27 per unit per year (primarily direct storage costs and forgone profit on investment in inventory). Demand for the item is reasonably constant over time, and the forecast is for 16, 500 units per year. When an order is placed for the item, the entire order is immediately delivered to the firm by the supplier. The firm operates 6 days a week plus a few Sundays, or approximately 320 days per year. Determine the following: Optimal order quantity per order Total annual inventory costs Optimal number of orders to place per year Number of operating days between orders, based on the optimal ordering.Explanation / Answer
We have following information
Annual demand D= 16,500 unit
Ordering cost S = $ 70 per order
Holding or carrying cost H = $ 27 per unit per annum
Number of working days in a year is 320 day
a. Optimum Order quantity per order is EOQ
EOQ = sqrt (2* D*S/H) = sqrt(2*16,500*70/27) = 292.50 units
b. Total Annual Inventory cost = total ordering cost + total carrying cost
= (D/Q)* S + (H*Q)/2 = (16,500/292.50)*70 + (27*292.50)/2 = $7,897.47
Here EOQ = Q
c. Optimal number of order per year = annual demand / EOQ = 16,500/292.50 = 56.41 orders
d. Optimal number of days between two orders = No. of working days per year / number of orders per year
= 320 / 56.41 = 5.67 days
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.