Question

aily sales = 275 unitsCost of capital = 25%Std. deviation of daily demand = 44Inventory Risk = 1%Cost to place an order = $26Storage space = 5%Freight cost = $225Insurance = .5%Avg. Inventory (last 12 months) = 2,500 unitsCurrent number of warehouses = 16Cost of 1 unit of inventory = $100Prime interest rate = 3.6%Cost of Goods Sold = $4,000,000Taxes = 1.5%Selling price of 1 unit = $200Average annual depreciation = 15%Avg. replenishment cycle = 12 daysStd. dev. of replenishment cycle = 2 daysAverage inventory value = $250,000Forecast error = 13%Re-stock fee is $45Days in a year = 3601. What is the ICC%?2. What is the value of R? (in the EOQ formula)3. What is the value of V?4. What is the value of S?5. What is the value of Q?6. If the company plans to close 12 of their warehouses over the next 12 months, how much inventory should they expect to have a year from now?7. How much safety stock should the company hold if it wants to ensure a 98.3% service level?

Answer 1

1) ICC% is inventory carrying cost expressed as percentage of annual inventory cost. Here it is Cost of capital +Inventory Risk+Storage space+Insurance +Prime interest rate+Taxes +Average annual depreciation = 51.6%

2) In EOQ formula small r may indicate holding cost per unit; but capital R as mentioned in the question, imply the reorder point= (Lead time *daily usage/sales) + Safety stock

Where safety stock will include extra stock for uncertain demand, delay in lead time for replenishment and extra stock due to forecast error

R= (12 * 275) +[{ 44*12} + {2* (275+ 44)}] = 3300 + 1166 = 4466 units

But we need to also keep surplus as forecasting error can happen but only on forecasted deviations. i.e. 13% of {[44*12] +[2*44]} = 80.08

Thus R= 4466 + 80.08= 4546.08 units

3) Value of V is unit production cost i.e. 100$ in the question

4) Value of S is fixed cost of each order; it is $26 in the question.