For an inventory item, suppose the demand is 1210/month, lead time is 2.5 weeks,
ID: 465168 • Letter: F
Question
For an inventory item, suppose the demand is 1210/month, lead time is 2.5 weeks, and safety stock is 9. The item cost is $16, the unit ordering cost is $342/order, and the unit carrying cost is $1.30/item/quarter.
Question 8. How many of the statements are true for the optimal inventory policy that minimizes total cost in this problem?
(A) 0 (B) 1 (C) 2 (D) 3 (E) 4
Statement 1. The total annual ordering cost (TOC) is $3593.21
Statement 2. The total annual carrying cost (TCC) is $3593.21
Statement 3. The total annual cost (TC) is $7233.23
Statement 4. The total carrying cost for safety stock per inventory period is $2.50
Question 9. How many statements are true?
(A) 0 (B) 1 (C) 2 (D) 3 (E) 4
Statement 1. EOQ increases as the unit ordering cost decreases
Statement 2. EOQ increases as the unit carrying cost decreases
Statement 3. EOQ increases as the safety stock decreases
Statement 4. EOQ increases as the lead time decreases
Explanation / Answer
The formula for Economic Order Quantity (EOQ) is SQRT(2*Annual demand*Ordering cost / Carrying cost )
say EOQ = SQRT (2AD/CI)
and formula for Ordering plus carrying cost is TEC = SQRT(2*Annual demand*Ordering cost*Carrying cost)
say TEC = SQRT (2*A*D*CI)
Using the above formula the EOQ is calculated as 1382 and only first two statements about ordering costs and carrying costs are true. The annual total cost must include the purchase cost of 16*1210*12 and safety stock is 9 units and carrying cost is 1.3/unit/quarter. Therefore answer to question 8 is (C) 2.
Statement 1. EOQ increases as the unit ordering cost decreases
Statement 2. EOQ increases as the unit carrying cost decreases
Statement 3. EOQ increases as the safety stock decreases
Statement 4. EOQ increases as the lead time decreases
In view of the formula for EOQ Statement 1 is wrong and Statement 2 is correct and other two statements are also incorrect.
Therefore correct answer to question 9 is (B) 1
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