Item X is a standard item stocked in a company\'s inventory of component parts.
ID: 469368 • 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 1,900 of item X, which costs $25 each. Storage costs, which include insurance and cost of capital, amount to $6 per unit of average inventory. Every time an order is placed for more item X, it costs $22.
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.)
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 1,900 of item X, which costs $25 each. Storage costs, which include insurance and cost of capital, amount to $6 per unit of average inventory. Every time an order is placed for more item X, it costs $22.
Explanation / Answer
a) EOQ = SQRT(2 × Quantity × Cost Per Order / Carrying Cost Per Unit)
= Sqrt(2*1900*22/6) = 118
Order size = 118
b) Number of orders = 1900/118 = 16.101
Thus, Ordering Cost = 16.101*22 = 354.24
c) Average Inventory = (0+118)/2 = 59
Inventory Holding Cost = 59*6 = 354
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