Question

Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 56,000 units per year, an ordering cost of $8 per order, and carrying costs of $1.40 per unit.

a. What is the economic ordering quantity?
b. How many orders will be placed during the year?
c. What will the average inventory be?
d. What is the total cost of ordering and carrying inventory?

Answer 1

Answer:

a ) Economic Order Quantity (Q) = √2SD/ H
where S is the ordering cost per order; D is the demand in units; H is the holding or carrying cost per unit

Q = √2 * 8 * 56000/1.40 = 800 units (inventory order sixe)

b) Number of orders to be placed = D / Q
Number of orders to be placed = 56000 / 800 = 70 orders

c) For calculating average inventory, we need opening and closing inventory
So, as for now: Average inventory level will be calculated as (0 + Q)/2 = Q/2 = 800/2 = 400 units

d) Total Ordering Cost = Number of orders * Ordering cost per order
Total Ordering Cost = 70 * 8 = $560

Total carrying cost = (Q/2) * H
Total carrying cost = (800/2) * 1.40 = $560