Diagnostic Supplies has expected sales of 102,400 units per year, carrying costs
ID: 2818218 • Letter: D
Question
Diagnostic Supplies has expected sales of 102,400 units per year, carrying costs of $2 per unit, and an ordering cost of $4 per order.
a. What is the economic ordering quantity?
Economic ordering quantity ____ units
b-1. What is the average inventory?
Average Inventory _____ units
b-2. What is the total carrying cost?
Total Carrying Cost _______
Assume an additional 40 units of inventory will be required as safety stock.
c-1. What will the new average inventory be?
Average Inventory ____ units
c-2. What will the new total carrying cost be?
Total Carrying Cost ____
Explanation / Answer
Solution:
a) Economic Order quantity =
Annual sales = 102400
O = Ordering cost = $4 per order
C = carrying cost = $2 per unit
EOQ =
((2*102400*4)/2)^1/2= 640 units
Economic order quantity = 640 units
b1. Average inventory = EOQ / 2
= 640/2
= 320
b 2 Total Carrying cost = 320 units * $ 2
= $640
C 1 New average inventory = EOQ / 2 + Safety stock
= 320+ 40
= 360 units
C 2 New total carrying cost = 360 units * $2
= $720