The Central Valve Company sells industrial valves and fluid control devices. One
ID: 402823 • Letter: T
Question
The Central Valve Company sells industrial valves and fluid control devices. One of Central's most popular valves is the Western, which has an annual demand of 6,000 units. The price of each valve is $78, the inventory carrying cost is $6 per unit per year, and the ordering cost is $40 per order.
What is the optimal annual cost of ordering and carrying inventory? Specify as a whole number by rounding the final result. If you are using a hand-held calculator, use at least 4 decimal digits for computations.
Explanation / Answer
D=6'000
P=78
H=6
C=40
EOQ = Q* = %u221A(2%u2022C%u2022D/H) = %u221A(2%u202240%u20226'000/6) = %u221A80'000 %u2248 282.843
Orders = D/EOQ = 6'000/282.843 %u2248 21
Annual cost of ordering [without stock by itself] = Orders %u2022 C = 21%u202240 %u2248 849
Average stock = EOQ/2 %u2248 141
Annual cost of carrying inventory = Average stock %u2022 H = 141%u20226 = 849
TC[MIN]= P%u2022D +C%u2022D/Q +H%u2022Q/2=78%u20226'000 + 40%u20226'000/283 + 6%u2022283/2 %u2248 469'697
But actually some additional safety stock should be considered because of instability with delivery, also it's better to take into account seasonal demand volatility. Another thing - most orders/cargoes are delivered mixed way, e.g. not only one good ordered from same supplier with the same truck - so ordering schedules usually are adjusted one to another.