For supply item ABC, Andrews Company has been ordering 125 units based on the re
ID: 2381997 • Letter: F
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
1,750
Days used per year
250
Lead time, in days
28
Ordering costs
$100
Annual unit carrying costs
$35
Determine the EOQ, average inventory, orders per year, average daily demand, reorder point, annual ordering costs, and annual carrying costs.
Annual demand in units
1,750
Days used per year
250
Lead time, in days
28
Ordering costs
$100
Annual unit carrying costs
$35
Explanation / Answer
Hi,
Please find the answer as follows;
EOQ = square root ( 2* ordering cost * demand / carrying cost) = square root(2*100*1750/35) = 100 Units
Average Inventory = EOQ/2 = 100/2 = 50 Units
Orders Per Year = Demand/EOQ = 1750/100 = 17.50 Orders
Average Daily Demand = Demand/Days Used = 1750/50 = 7 units
Reorder Point = Lead Time * Daily Demand = 28*7 = 196
Annual Ordering Cost = Ordering Cost * Orders Per Year = 100*17.50 = 1750
Annual Carrying Cost = EOQ * Carrying Cost /2 = 100 * 35/2 = 1750
Thanks.