Question

Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 97,200 units per year, an ordering cost of $4 per order, and carrying costs of $1.50 per unit.
(a) What is the economic ordering quantity?
(b) How many orders will be placed during the year?
(c) What will the average inventory be?
(d) What is the total cost of ordering and carrying inventory?

Answer 1

Explanation:

The computation is shown below:

a. The computation of the economic order quantity is as follows:

= $\sqrt{\frac{2\times \text{Annual demand}\times \text{Ordering cost}}{\text{Carrying cost}}}$

$= \sqrt{\frac{2\times \text{97,200}\times \text{\ 4}}{\text{\ 1.50}}}$

= 720 units

b. The number of orders would be equal to

= Annual demand ÷ economic order quantity

= $97,200 ÷ 720 units

= 135 orders

c. The average inventory would equal to

= Economic order quantity ÷ 2

= 720 units ÷ 2

= 360 units

d. The total cost of ordering cost and carrying cost equals to

Ordering cost = Number of orders × ordering cost per order

= 135 orders × $4

= $540

Carrying cost = average inventory × carrying cost per unit

= 360 units × $1.50

= $540