Question

Thomas Kratzer is the purchasing manager for the headquarters of a large insurance company chain with a central inventory operation.​ Thomas's fastest-moving inventory item has a demand of 6 comma 000 units per year. The cost of each unit is ​$98​, and the inventory carrying cost is ​$8 per unit per year. The average ordering cost is ​$29 per order. It takes about 5 days for an order to​ arrive, and the demand for 1 week is 120 units.​ (This is a corporate​ operation, and there are 250 working days per​ year). ​a) What is the​ EOQ? 208.57 units ​(round your response to two decimal​ places). ​b) What is the average inventory if the EOQ is​ used? 104.29 units ​(round your response to two decimal​ places).

Answer 1

Answer:

a. 208.57 units

b. 104.29 units

Explanation:

a. The computation of the economic order quantity is shown below:

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

$= \sqrt{\frac{2\times \text{6,000}\times \text{\ 29}}{\text{\ 8}}}$

= 208.57 units

b. And, the average inventory is

= Economic order quantity ÷ 2

= 208.57 units ÷ 2

= 104.29 units

We simply applied the above formulas for calculation of the economic order quantity and the average inventory and the same is shown above