For supply item ABC, Andrews Company has been ordering 125 units based on the re

Question

For supply item ABC, Andrews Company has been ordering 125 units based on the recommendation of the salesperson who calls on the company monthly. A new purchasing agent has been hired by the company who wants to start using the economic-order-quantity method and its supporting decision elements. She has gathered the following information: Annual demand in units 250 Days used per year 250 Lead time, in days 10 Ordering costs $100 Annual unit carrying costs $20 Determine the EOQ, average inventory, orders per year, average daily demand, reorder point, annual ordering costs, and annual carrying costs (17 points).

Explanation / Answer

EOQ = The square root of [(2 x 250 x $100) / $20] = 50 Average inventory = 50/2 = 25 Orders per year = 250/50 = 5 Average daily demand = 250/250 = 1 unit Reorder point = 10/1 = 10 units Annual ordering costs = 5 x $100 = $500 Annual carrying costs = 25 x $20 = $500

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