You were hired last year as the manager of accounts receivable for a medi-um sized company. In the following year, while sales o
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Answer:
a) The optimum order quantity is 789 units per order.
b) They have to reorder every 0.72 days.
2)
a) It is not a good policy.
b) The quantity per order is greater than the optimum quantity per order.
c) The order quantity should be 632 units/order
Explanation:
The carry costs are the costs incurred by the company for having the products in stock (financial, storage, etc). They are proportional to the average inventory held by the company.
The order costs are the costs associated with the purchase order. They are proportional to the amounts of purchase orders by unit of time.
a) The optimum order quantity can be calculated with the Economic Order Quantity (EOQ) formula. This formula minimizes the sum of the carry costs and the order costs.
In this formula:
EOQ: Economic Order Quantity or optimum order quantity
S: Order costs
D: Annual quantity demanded
H: Carry cost
The optimum order quantity is 789 units per order.
b) If the annual demand is 400,000 and the quantity per order is 789 units, the company will do 506.97 orders a year.
If we take 365 days a year, we have 1.39 orders a day.
This means it has to reorder every 0.72 days.
2) If we apply the EOQ formula we get:
a) It is not a good policy.
b) The quantity per order is greater than the optimum quantity per order.
c) The order quantity should be 632 units/order