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 stock outs resulting from higher- than-expected demand during lead time. Maintaining a safety stock avoids the costs of stock outs, 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).
A decrease in inventory order costs will
A decrease in inventory ordering costs should decrease the economic order quantity. The effect is that more orders can be made of smaller quantities) without increasing costs.Accordingly, in the EOQ model, ordering cost is a numerator value.
Which one of the following items is not directly reflected in the basic economic order quantity EOQ) model?
Answer(s): D
The basic EOQ model minimizes the sum of ordering or setup) and carrying costs. Included in the formula are annual demand, ordering or setup) costs, and carrying costs. Carrying costs include warehousing costs, insurance, spoilage, obsolescence, and interest on invested capital. The cost of the inventory itself and any quantity discounts lost on inventory purchases are not components of the EOQ model.
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