Item X is a standard item stocked in a company\'s inventory of component parts.
ID: 3218460 • Letter: I
Question
Item X is a standard item stocked in a company's inventory of component parts. Each year the firm, on a random basis, uses about 1, 700 of item X, which costs $25 each. Storage costs, which include insurance and cost of capital, amount to $8 per unit of average inventory. Every time an order is placed for more item X, it costs $26. Whenever item X is ordered, what should the order size be? (Round your answer to the nearest whole number.) What is the annual cost for ordering item X? (Round your answer to 2 decimal places.) What is the annual cost for storing item X? (Round your answer to 2 decimal places.)Explanation / Answer
a) Economic order quantity = Sqrt( 2 x A x O / C)
Where,
A = Annual demand = 1,700 units.
O = Ordering cost per order = $26
C = Carrying cost or Storage cost per unit per annum = $8
So, EOQ = Sqrt( 2 x 1,700 x 26 / 8) = 105.12 or 105 units.
b) Number of orders per year = A / EOQ = 1,700 / 105 = 16.19 or 17 orders.
So, ordering costs = 17 x $26 = $442
c) Storing cost of average inventory = (EOQ / 2) x $8 = (105 / 2) x $8 = $420
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