Alexis Co. uses 800 units of a product per year on a continuous basis. The produ

Question

Alexis Co. uses 800 units of a product per year on a continuous basis. The product has a fixed cost of $50 per order, and its carrying cost is $2 per unit per year. It takes 5 days to receive a shipment after an order is placed, and the firm wishes to hold 10 days' usage in inventory as a safety stock.

a) calculate the EOQ

b) determine the average level of inventory (365-day year to calculate daily usage)

c) determine the reorder point

d) indicate which of the following variables change if the firm does not hold the safety stock: (1) order cost, (2) carrying cost, (3) total inventory cost, (4) reorder point, (5) economic order quantity. Explain?

Explanation / Answer

Ordering cost (O) = $ 50 per order

Demand in units per year (D)= 800 Units

Carrying cost per unit per year (C )= $ 2 per unit per year

Re-ordering period(lead time in days ) = 5 days

Safety Stock = 10 days usage   =800/365*10= 21.91 or 22 units

Daily average demand= 800/365= 2.91

=((2 × F × D)/C)(1/2)

= ((2 x50 x 800)/2)(1/2)

= 200 units

2. Average Level of inventory : ((0+200)/2)

= 100 Units

3. Re order Point= Lead Time in Days x Daily average usage + Safety stock

= 5*2.19+22

= 10.96+22

= 32.96 or 33 units

4. If the the firm does not hold safety stock then the re ordering point will change . because while computing re order point we add the safety stock to the re ordering consumption calculation . Rest all the variables no impact on the safety stock.

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