Novelty Gifts, Inc. is experiencing some inventory control problems. The manager

Question

Novelty Gifts, Inc. is experiencing some inventory control problems. The manager,
Wanda LaRue, currently orders 10,000 units four times each year to handle annual
demand of 40,000 units. Each order costs $15 and each unit costs $1.50 to carry. Ms.
LaRue maintains a safety stock of 200 units.

a) What is Novelty Gifts' current total annual inventory cost?
b) Calculate the economic ordering quantity (EOQ).
c) What is average inventory under EOQ if Ms. LaRue maintains a safety stock of 200
units.
d) Calculate total annual inventory cost under EOQ. How does this compare to her
current inventory costs?

Explanation / Answer

a. Average inventory level = Q/2 = 5,000/2 = 2500 units + 200 units = 2,700 units b. Number of orders placed per year (N) = D/ Q = 20,000/5,000 = 4 orders c. Annual inventory holding cost = (Q/ 2) x H = (2,700)(1.5) = $4,050 Total annual ordering cost = (D/Q) (S) = (4)(15) = $60 e. Total annual cost = $4,050 + $600 = $4,110 b). EOQ = D = 20,000 S = 15 H = 1.5 EOQ = 632 units. c).Average inventory level = 632/2 + 200 = 516 units d). a. Average inventory level = Q/ 2 = 632/2 = 316 units + 200 units = 516 units b. Number of orders placed per year (N) = D/ Q = 20,000/5,000 = 32 orders c. Annual inventory holding cost = (Q/ 2) x H = (516)(1.5) = $774 Total annual ordering cost = (D/Q)(S) = (32)(15) = $480 e. Total annual cost = $774+ $480 = $1,254

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