Question

Diagnostic Supplies has expected sales of 50,000 units per year, carrying costs of $2 per unit, and an ordering cost of $5 per order.

a. What is the economic ordering quantity?

b-1. What is the average inventory?

b-2. What is the total carrying cost?

Assume an additional 40 units of inventory will be required as safety stock.

c-1. What will the new average inventory be?

c-2. What will the new total carrying cost be?

Answer 1

Answer a.

Annual Sales, A = 50,000 units
Ordering Cost per order, O = $5
Carrying Cost per unit, C = $2

EOQ = (2 * A * O / C)^(1/2)
EOQ = (2 * 50,000 * $5 / $2)^(1/2)
EOQ = 250,000^(1/2)
EOQ = 500 units

Answer b-1.

Average Inventory = EOQ / 2
Average Inventory = 500 / 2
Average Inventory = 250 units

Answer b-2.

Total Carrying Cost = Average Inventory * Carrying Cost per unit
Total Carrying Cost = 250 * $2
Total Carrying Cost = $500

Answer c-1.

Average Inventory = EOQ / 2 + Safety Stock
Average Inventory = 500 / 2 + 40
Average Inventory = 290 units

Answer c-2.

Total Carrying Cost = Average Inventory * Carrying Cost per unit
Total Carrying Cost = 290 * $2
Total Carrying Cost = $580