Question

A hardware store obtains its bagged cement from a single supplier. Demand is reasonably constant throughout the year, and last year the company sold 1,000 bags of this product. The costs of placing an order is estimated at RM50 and the annual inventory holding cost of is 5% of purchase cost. The store purchases the cement at RM50 per bag.

(a) Determine the optimum order size that the store should order at a time.

(b) Calculate the total annual inventory cost (ordering + holding). (5 marks

Answer #1

ANNUAL DEMAND = 1000

ORDERING COST = 50

HOLDING COST = 5

COST PER UNIT = 50

EOQ = SQRT(2 * ANNUAL DEMAND * ORDERING COST / HOLDING COST PER UNIT) = SQRT(2 * 1000 * 50 / 5) = 141

ANNUAL HOLDING COST = (EOQ / 2) * HOLDING COST PER UNIT = (141 / 2)
* 5 = 352.5

ANNUAL ORDERING COST = (DEMAND / EOQ) * ORDERING COST = (1000 / 141) * 50 = 354.61

TOTAL COST OF MANAGING INVENTORY = ANNUAL HOLDING COST + ANNUAL ORDERING COST = 352.5 + 354.61 = 707.11

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