The X is a standard item stocked in a company's inventory of component parts. Each year the firm, on a random basis, uses a bout 2,000 of item X, which costs $25 each. Storage costs, which include insurance and cost of capital, amount to $5 per unit of average inventory. Every time an order is placed for more item X, it costs $10.
a. Whenever item X is ordered, what should be the order size?
b. What is the annual cost for ordering item X?
c. What is the annual cost for storing item X?
Annual demand usage (average), D = 2000
Cost of the item, C = $25
Storage/Inventory cost. I = $5
Ordering cost, S= $10
By Economic order quantity ...
Solution gives calculations for finding optimal order quantity and total annual cost