Question

Appliance for Less is a local appliance store. It costs this store $21.75 per unit annually for storage, insurance, etc., to hold microwave in their inventory. Sales this year are anticipated to be 660 units. Each order costs $60. The company is using Economic Order Quantity model in placing the orders.

What is the average inventory held during the year including safety stock if the store insists on a 2 days safety stock (assume 365 days a year)?

(Round the answer to the whole number)

Answer 1

Ans.	Economic order Quantity   =   (2 * Total sales * ordering cost per unit / carrying cost per unit)^0.5
		(2 * 660 * $60 / $21.75) ^ 0.5
		($79,200 / $21.75) ^ 0.5
		$3,641.38 ^ 0.5
		60.34 units
	Safety stock   =   Annual sales in units / No. of days in year * No. of days of safety stock
		660 / 365 * 2
		3.62  units
	Average inventory = (Economic order quantity / 2) + Safety stock
		(60.34 / 2) + 3.62
		30.17 + 3.62
		33.79 units or 34 units (rounded)