Question

The Cheap Store starts with 700 units stocks every week. The stock is used up each week and a reorder is made to replace the used up items. If the yearly carrying cost per unit is RM20 and the fixed order cost is RM80. (Note: there are 52 weeks in a year).

Calculate the

i. Carrying cost

ii. Restocking Costs

iii. The economic order quantity

iv. Number of orders per year

v. DO you think that the company's inventory policy is optimal? How can the company achieve optimal level?

Answer 1

Economic Order Quantity Q

D = Demand each year = 700*52
CO = Cost of each order = 80
CH= Cost of holding/Carrying each unit of inventory = 20

Q = 539.62 ~ 540 Units

Number of orders each year
= Annual demand/EOQ = 700*52 / 540 = 67.40 ~ 68

Ordering / Restocking cost
= Number or orders per year × Cost per order

= 68 * 80 = 5440

Carrying cost
= Average units × Holding cost per unit

= ( Q/2) * CH

= (540/2) * 20 = 5400

Ans :

i. Carrying cost = 5400

ii. Restocking Costs = 5440

iii. The economic order quantity = 540 Units

iv. Number of orders per year = 68

v. Since the no of current order quantity is 700 Units so company should decrease the order quantity to reach optimal EOQ level of 540 Units.