Question

The Milling Corp has developed a new type of widget. The local distributor expects to increase his sales by 25% over the past year due to this new development. Last year's sales were $150,000 at a selling price of $100 per units. A safety stock of 35 units has eliminated stock outs. The manager would likes to cut cost as much as possible and comes to you for your advice. Warehouse space $2.5 p/unit materials handling expense $1.5/unit Insurance Premium $1.00/unit Total ordering cost $100 /per order A. what is the economic order Quantity? B.what is the amount of average inventory? C. How many orders will be made per year? D. What is the total cost of this inventory decision?

Answer 1

A.Economic Order Quantity=(2*Annual usage*ordering Cost)/Cost of carring one unit

Annual usage=last years usage*1.25

=150,000/100*1.5=1875

Carring cost per unit =2.5+1.5+1=5=5% of selling price

EOQ=2*1875*100/.05

=75000=273.86 (274 when rounded to number )

B.Amount of averae of Average inventory=(EOQ/+2+safety stock)*100

=(274/2+35)*100=172*$100=$17,200

C.Number of orders per year=total sales/EOQ

=1875/274=6.84orders per year(7orders when rounded to number)

D.Total Cost of inventory decision=(ordering cost*7)+(average inventory*carrying cost)

=(100*7)+(172*5)

=700+860=$1560