Question

Alexis Company uses 800 units of a product per year on a continuous basis. The product has a fixed cost of $50 per order, and its carrying cost is $2 per unit per year. It takes 5 days to receive a shipment after an order is placed. And the firm wishes to hold 10 days usage in inventory as a safety stock Calculate the EOQ Determine the average level of inventory. (Note: Use a 365 day year to calculate daily usage) Determine the reorder point Indicate which of the following variable change if the firm does not hold the safety stock: (1) order cost, (2) carrying cost, (3) total inventory cost (4) reorder point (5) economic order quantity. Explain.

Answer 1

Solution:

a)Calculation of EOQ

EOQ=SQRT[2*annual demand*cost per order/carrying cost]

=SQRT[(2*800*$50)/$2]

=SQRT(40,000)

=200 units

b)Average inventory level

=(EOQ+2*safety stock)/2

Safety stock=(800 units/365)*10=22 units

Average inventory level=(200+2*22)/2

=122 units

c)Calculation of reorder point

=(Days of lead time*consumption in lead time)+safety stock

=11+22

=33 units

d)1.Order cost will not change as the firm will need to place same no. of order

2.carrying cost will decrease as the average level of inventory will decrease.

3.Total inventory cost will decrease due to decrease in carrying cost.

4.Reorder point will reduced as there is no safety stock.

5.Economic order quantity will decrease as the annual carrying cost per unit will decrease.