Business
posted by Jackson .
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 6000 units per year. The cost of each unit is $100.00, and the inventory carrying cost is $10.00 per unit per year. The average ordering cost is $30.00 per order. It takes about 5 days for an order to arrive, and demand for 1 week is 120 units (this is a corporate operation, there are 250 working days per year).
a. What is the EOQ?
b. What is the average inventory if the EOQ is used?
c. What is the optimal number of orders per year?
d. What is the optimal number of days in between any two orders?
e. What is the annual cost of ordering and holding and holding inventory?
f. What is the total annual inventory cost, including cost of the 6,000 units?

Business 
Gin
a. What is the EOQ? = 189.74 units
Step (1): Determine the Annual Setup Cost
*Annual setup cost = (# of orders placed per year) x (Setup or order cost per order)
= Annual Demand
# of units in each order ¡Á (Setup or order cost per order)
= (D/Q) ¡Á(S)
= (6000/Q) x (30)
Step (2): Annual holding cost = Average inventory level x Holding cost per unit per year
= (Order Quantity/2) (Holding cost per unit per year)
= (Q/2) ($10.00)
Step (3):
Optimal order quantity is found when annual setup cost equals annual holding cost:
(D/Q) x (S) = (Q/2) x (H)
(6,000/Q) x (30) = (Q/2) (10)
=(2)(6,000)(30) = Q2 (10)
Q2 = [(2 ¡Á6,000 ¡Á30)/($10)] = 36,000
Q = ¡Ì([(2 ¡Á6,000 ¡Á30)/(10)]) = ¡Ì36,000
Q = 189.736 ¡Ö 189.74 units
EOQ = 189.74 units
b. What is the average inventory if the EOQ is used?
Average inventory level = (Order Quantity/2)
= (189.74) /2 = 94.87
Average Inventory level =94.87 units
c. What is the optimal number of orders per year?
N= ( Demand/ order quantity) = (6000/ 189.736)=31.62
N = 31.62
The optimal number of orders per year = 31.62
d. What is the optimal number of days in between any two orders?
T = (Number of Working Days per year) / (optimal number of orders)
T = 250 days per year / 31.62 = 7.906
T= 7.91
The optimal number of days in between any two orders = 7.91
e. What is the annual cost of ordering and holding inventory?
(Q) x (H)
(189.736 units) x ($10) =$1,897.36
¡Ö $1,897
The annual cost of ordering and holding the inventory = $1,897
f. What is the total annual inventory cost, including cost of the 6,000 units?
TC = setup cost + holding cost
TC = (Dyear/Q) (S) + (Q/2) (H)
TC = (6,000/189.74) ($30.00) + (189.74/2) ($10.00)
TC = $948.67 + $948.7
TC = 1,897.37 ¡Ö $1,897
Purchase cost = (6,000 units) x ($100/unit) = $600,000
Total annual inventory cost = $600,000 + $1,897 = $601,897
Total annual inventory cost = $601,897
Respond to this Question
Similar Questions

accounting
Eddings Company had a beginning inventory of 400 units of Product XNA at a cost of $8.00 per unit. During the year, purchases were: Feb. 20 600 units at $9 Aug. 12 300 units at $11 May 5 500 units at $10 Dec. 8 200 units at $12 Eddings … 
math
Eddings Company had a beginning inventory of 400 units of Product XNA at a cost of $8.00 per unit. During the year, purchases were: Feb. 20 600 units at $9 May 5 500 units at $10 Aug. 12 300 units at $11 Dec. 8 200 units at $12 Eddings … 
Stats
Consider the Avionic Manufacturing Company that wishes to meet a demand of 10 units per month by purchasing the items from a vendor with a lead time of threequarters of a month. The item cost is $2.50 per unit, replenishment cost … 
business
At the end of January, Mineral Labs had inventory of 725 units, which cost $10 per unit to produce. During February the company produced 650 units at a cost of $14 per unit. If the firm sold 1,000 units in February, what was the cost … 
business
On December 31 of last year, Wolfson Corporation had in inventory 400 units of its products, which cost $21 per unit to produce. During January, the company produced 800 units at a cost of $24 per unit. Assuming that Wolfson Corporation … 
math
A sporting goods company has a distribution center that maintains inventory of fishing rods. The fishing rods have the following demand, lead time, and cost characteristics: Average demand = 95 units per day, with a standard deviation … 
math
You manage inventory for your company and use a continuous review inventory system to control reordering items for stock. Your company is open for business 310 days per year. One of your most important items experiences demand of 24 … 
Quantitative methods.
INVENTORY MODEL The demand for a particular item is 10 000 units per yer. The number of units per order is 900. The set cost is rs 90 per order, the cost of item is rs2 per item and the holding cost is rs 080 per item per month. If … 
Business Math
As a newly hired staff accountant for Jordan Designs, you have been asked to conduct the yearend physical inventory. During the process, you observe that much of the inventory is outdated and there fore could not be sold for the recorded … 
mangerial economics
suppose it cost $1000 to prepare a factory to produce a certain item,after the preparation is complete, it cost $40 to produce each item. After the items are produced, it cost an average of $10 per year for each item held in inventory. …