Question

Jones Surgicenter uses 90,000 bags of IV solution annually. The optimal safety stock (which is on hand initially) is 1,000 bags. Each bag costs the center $1.50, inventory carrying costs are 20 percent, and the cost of placing an order with the supplier is $15. a. What is the economic order quantity? b. What is the maximum inventory of IV solution bags? c. What is the center's average inventory of IV solution bags? d. How often must the center order (in days)? Please show all formulas and calculations used to derive the answers. Thank you.

Answer 1

Ans. a. Economic order quantity = square root of (2* annual requirement * ordering cost) / carrying cost

Economic order quantity = square root of (2 X 90000 X 15) / 0.30

= square root of 9000000

= 3000 bags

* Carrying cost = 20% of 1.50 = 0.30

Ans. b Maximum solution of  IV solution bags = EOQ + safety stock

= 3000 + 1000

= 4000 bags

Ans. c  Average inventory of IV solution bags = (EOQ / 2) + safety stock

= (3000 / 2) + 1000

= 2500 bags

Ans.d Center order (in days) = Annual requirement / EOQ

= 90000 / 3000

= 30 days