Aberwald Corporation expects to order 126,000 memory chips for inventory during

Question

Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $175 per order; the purchase price per chip is $25; and the firm's inventory carrying cost is equal to 20 percent of the purchase price. (Assume a 360-day year.)

(a) If the lead time for placing an order is 5 days, and Aberwald holds a safety stock equal to a 30-day supply of chips, then at what inventory level should an order be placed?

(b) If Aberwald holds a safety stock equal to a 30-day supply of chips, what is Aberwald's minimum total cost of ordering and carrying inventory?

Please show all work step by step

Explanation / Answer

EOQ = (2*Annual demand*Ordering cost/Carrying cost)

= (2*126,000*$175 per order/$25*0.2)

= (44,100,000/$5)

= 8,820,000

= 2,770

a)

Average inventory level = (2,770/2) + 30*350(126,000/360 days)

= 1,385 + 10,500

= 11,885

b)

Maximum inventory level = EOQ + Safety stock

= 2,770 + 10,500

= 13,270

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