Answer:
a. 775 units
b. $670
c. 44 units
Explanation:
a. The computation of the economic order quantity is shown below:
= [tex]\sqrt{\frac{2\times \text{Annual demand}\times \text{Ordering cost}}{\text{Carrying cost}}}[/tex]
= [tex]\sqrt{\frac{2\times \text{4,000}\times \text{\$60}}{\text{\$0.80}}}[/tex]
= 775 units
b. The minimum total annual inventory cost is
= Ordering cost + carrying cost
where,
Ordering cost =
The number of orders would be equal to
= Annual demand ÷ economic order quantity
= 4,000 ÷ 775 units
= 5.61 orders
Ordering cost = Number of orders × ordering cost per order
= 6 orders × $60
= $360
The carrying cost is
The average inventory would equal to
= Economic order quantity ÷ 2
= 775 units ÷ 2
= 387.5 units
The total cost of ordering cost and carrying cost equals to
Carrying cost = average inventory × carrying cost per unit
= 387.5 units × $0.80
= $310
So, the minimum total annual inventory cost is
= $360 + $310
= $670
The computation of the reorder point is shown below:
= Demand × lead time + safety stock
where, Demand equal to
= Expected demand ÷ total number of days in a year
= 4,000 ÷ 365 days
= 10.95890
So, the reorder point would be
= 10.95890 × 4 + $0
= 44 units
