Thomas Kratzer is the purchasing manager for the headquarters of a large insuran

Question

Thomas Kratzer is the purchasing manager for the headquarters of a large insurance company chain with a central inventory operation. Thomas's fastest-moving inventory item has a demand of 5,850 units per year. The cost of each unit is $105, and the inventory carrying cost is $8 per unit per year. The average ordering cost is $29 per order. It takes about 5 days for an order to arrive, and the demand for 1 week is 117 units. (This is a corporate operation, and there are 250 working days per year). What is the EOQ? 206 units (round your response to two decimal places). What is the average inventory if the EOQ is used? 103 units (round your response to two decimal places). What is the optimal number of orders per year? orders (round your response to two decimal places).

Explanation / Answer

Demand per year for the fastest moving item 5850 Units Cost of each Unit = 105 $ Cost of processing each order 29 $ Holding cost per Unit for year 8 $ EOQ =((2DK)/H)^0.5 D = Total Demand for year (250 days) equal to 5850 Units K = Ordering cost/ order 29 $ H = holding cost per unit/ year 8 $ a) As per above formula EOQ will be 206 Units Now, the material will reach the company after 5 days from the day of placing the order Thus the company has to order when the inventory is of 5 days One day invenory = Demand for year/ 250 days 23 Units 5 Days inventory = 1 Day inventory x 5 117 Units c) Optimal no of orders per year = Demand/ EOQ 28 b) Average inventory = (Max. Inventory + Min. Inventory)/2 (Order Qty + Qty when Order arrives)/2 equals = ( 206 + 0) /2 103 Units

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