Annual inventory holding costs equal
Answer(s): C
Given that demand is constant and the EOQ is 2, 500 units, the average inventory level--1 without regard to safety stock is 1, 250 units 2, 500 - 2). Adding safety stock results in an average level of 1, 750 units 1, 250 + 500). Given also that annual holding costs are 25% of average inventory and that unit cost i s U $4, total annual holding cost i s U $1 , 750 [(1 , 750 units : $4) 25%]. Using an EOQ analysis assuming a constant demand), it is determined that the optimal order quantity is 2, 500. The company desires a safety stock of 500 units. A five- day lead time is needed for delivery. Annual inventory holding costs equal 25°!a of the average inventory level. It costs the company US $4 per unit to buy the product, which it sells for US $8. It costs the company US $150 to place a detailed order, and the monthly demand for the product is 4, 000 units.
Total inventory ordering costs per year equal
Total annual demand is 48, 000 units 4, 000 per month x 12). Hence, total annual ordering costs equal US $2, 880 [$150 cost per order 48, 000 units - 2, 500 EOQ)].
An organization sells a product for which demand is uncertain. Management would like to ensure that there is sufficient inventory on hand during periods of high demand so that it does not lose sales and customers). To do so, the organization should
Answer(s): A
Safety stock is inventory maintained to reduce the number of stockouts resulting from higher-than-expected demand during lead time. Maintaining a safety stock avoids the costs of stockouts, e.g., lost sales and customer dissatisfaction.
The economic order quantity is the size of the order that minimizes total inventory costs which include ordering and holding carrying) costs. It can be calculated using the formulaIf Q = order size in units, D = annual demand in units, p = cost per purchase order, s = carrying cost per year for one unit of inventory. If the annual demand decreases by 369/o the optimal order size will
D decreases by 36%, that is, from 100% to 64%. Because .64 is the square of .8, the EOQ for .64D Q~) equals 80°'a of the EOQ for D(Q).
The economic order quantity. Q. is the size of the order that minimizes total inventory costs. These costs, which are composed of ordering and holding costs, can be computed using the following expression:If the organization decides to order 4.000 units at a time rather than 2.000 units. by hour much will its total inventory costs change?
When the order size is 2.000 units, the variable inventory costs are US $2.000 {[(2, 000 units $1) - 2] -I- [(20, 000 units - 2, 000 units) $100]}. When the order size is 4, 000 units, the variable inventor -.costs are US $2, 500 1[(4, 000 units $1) - 2] + [(20, 000 units - 4, 000 units) $100]}. The increase in inventor-.j costs is US $500 $2.500 - $2, 000).
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