Appliance for Less is a local appliance store. It costs this store $23.68 per unit annually for storage, insurance, etc., to hold microwave in their inventory. Sales this year are anticipated to be 664 units. Each order costs $91. 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)
Q* = (2SO/C)^(1/2)
where : Q* = the Economic Order Quantity
C = carrying cost per unit
S = total demand in units over the planning period
O= ordering cost per order
Q* = [(2 * 664 * $91) / $23.68]1/2
= [$120,848 / $23.68]1/2
= 71.44 units
Safety Stock = (annual sales in units / 365) * number of days of safety stock
= (664 / 365) * 2 = 1.82 * 2 = 3.64
Average inventory held during the year = (EOQ/2) + Safety Stock
= (71.44 / 2) + 3.64 = 39.36, or 40 units
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