Question

Wong Enterprises used a Continuous Review System (i.e., Q System) for controlling inventory for a specific end-item. The firm operates 5 days per week and 52 weeks a year and the end-item has the following characteristics:

            Demand (D) = 20,020 units/year

            Ordering Costs (S) = $40/order

            Holding Costs = $1/unit/six months

            Leadtime (L) = 10 days

            Cycle Service Level = 94.95%

            Assume that Demand is normally distributed; with Standard Deviation of weekly demand = 100 units.

            Current on-hand inventory is 1040 units, with no scheduled receipts and no backorders.

Q#1. The EOQ for this item is:

Answer 1

Q#1. The EOQ for this item is:

To calculate the Economic order quantity EOQ), we have following information

Annual Demand (D) = 20,020 units/year

Ordering Costs (S) = $40/order

Holding Costs (H) = $1/unit/six months or $2 per unit per year

Formula of economic order quantity (EOQ)

EOQ = ? (2 * Annual Demand * Ordering cost/ Inventory holding cost)

Therefore

EOQ = ? (2 * 20,020 *$40 / $2)

EOQ = ? (800,800)

EOQ = 894.87 or 895 units

The EOQ for this item is 895 units.