Item X is a standard item stocked in a company\'s inventory of component parts.
ID: 362676 • 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 1,800 of item X, which costs $25 each. Storage costs, which include insurance and cost of capital, amount to $14 per unit of average inventory. Every time an order is placed for more item X, it costs $18.
a. Whenever item X is ordered, what should the order size be? (Round your answer to the nearest whole number.)
b. What is the annual cost for ordering item X? (Round your answer to 2 decimal places.)
c. What is the annual cost for storing item X? (Round your answer to 2 decimal places.)
Explanation / Answer
Annual demand (D) = 1800 units
Ordering cost(S) = $18
Holding cost (H) = $14
a) Economic order quantity(Q) = sqrt of (2DS / H)
= sqrt of [(2 x 1800 x 18) / 14]
= 68 units
So whenever item X is ordered, the order size should be 68 units.
b) Annual cost for ordering = (D / Q) S = (1800/68)18 = $476.47
c) Annual cost for storing = (Q/2)H = (68/2)14 = $476.00
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