Thomas Kratzer is the purchasing manager for the headquarters of a large insurance company chain with a central inventory operation. Thomas's fastest-moving inventory item has a demand of 6 comma 000 units per year. The cost of each unit is $97, and the inventory carrying cost is $8 per unit per year. The average ordering cost is $29 per order. It takes about 5 days for an order to arrive, and the demand for 1 week is 120 units. (This is a corporate operation, and there are 250 working days per year). A) What is the EOQ?B) What is the average inventory if the EOQ is used?C) What is the optimal number of orders per year?

A) EOQ = 208.56 units

B) Average inventory = 104.28 units

C) Optimum number of order = 28.76 times

Explanation:

Economic order quantity is the order quantity that minimizes the balance of ordering and carrying cost.

Economic order quantity = √2× 29× 6,000/8=208.56 units

Average inventory = Minimum stock level +  Order quantity/2

minimum stock level is not given , hence

Average inventory = 208.56/2 = 104.28 units

Optimum number of order

Optimum number of order = Demand / order quantity

= 6000/208.56= 28.76 times.

EOQ = 208.56 units

B) Average inventory = 104.28 units

C) Optimum number of order = 28.76 times

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