Item X is a standard item stocked in a company\'s inventory of component parts.
ID: 470927 • 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 2,800 of item X, which costs $25 each. Storage costs, which include insurance and cost of capital, amount to $7 per unit of average inventory. Every time an order is placed for more item X, it costs $18.
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.)
a.Whenever item X is ordered, what should the order size be? (Round your answer to the nearest whole number.)
Explanation / Answer
A]Whenever item X is ordered, what should the order size be?
EOQ = SQUARE ROOT OF [2*ANNUAL DEMAND*ORDERING COST PER ORDER/CARRYING COST PER UNIT]
SQUARE ROOT OF [2*2800*18/7]
SQUARE ROOT OF [14400]
=120 UNITS
B]What is the annual cost for ordering item X?
= NO OF ORDERS * ORDERING COST PER ORDER
= (2800/120) * 18
=23.333 * 18
=420
C]What is the annual cost for storing item X?
=AVERAGE INVENTORY*CARRYING COST PER UNIT
=(120/2)*7
=420
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