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EOQ for Thomas Kratzer

Sample question to help me with my homework; I am having a hard time figuring out the steps. Thanks!

Thomas Kratzer is the purchasing manager for the headquarters of a large insurance company chain with a central inventory operation. Thomas' fastest moving inventory item has a demand of 6000 units per year. The cost of each unit is $100.00, and the inventory carrying cost is $10.00 per unit per year. The average ordering cost is $30.00 per order. It takes about 5 days for an order to arrive, and demand for 1 week is 120 units (this is a corporate operation, 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?
d. What is the optimal number of days in between any two orders?
e. What is the annual cost of ordering and holding and holding inventory?
f. What is the total annual inventory cost, including cost of the 6,000 units?

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Solution Preview

a. EOQ = Square root ((2X Annual Demand X Order cost)/Annual carrying cost)
EOQ = Square root ((2X 6,000 X 30)/10) = 189.74

b. Average inventory = EOQ/2 = 189.74/2 = 94.87 units. When we order on EOQ we would ...

Solution Summary

The solution explains some calculations relating to EOQ