Question

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)

Answer 1

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
= [5,103.38]^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