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Economic Order Quantity Calculation

Speedy Manufacturers wishes to determine the economic order quantity (EOQ) for a critical and expensive inventory item that is used in large amounts at a relatively constant rate throughout the year.

The firm uses 223 200 units of the item annually. Ith has order cost of R150 per order and its carrying costs associated with this item are R20 per unit per year.

The firm plans to hold safety stock of the item equal to 4 days of usage and it estimates that it takes 10 days to receive an order of the item once placed. Assume a 360 day year.

4.1 Calculate the firm's EOQ for the item inventory described above.
4.2 What is the firm's total cost based upon the EOQ calculated in 4.1.
4.3 How many units of safety stock should the firm hold?
4.4 What is the firm's re-order point for the item on inventory being evaluated.

Solution Preview

1. S = 223200 units; O= R 150/order; C = R 20/unit/year
EOQ = sqrt(2SO/C) = sqrt(3348000) = ...

Solution Summary

The solution assists in determining the economic order quantity calculation.