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Inventory management

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?


Solution Preview

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 Summary

Solution gives calculations for finding optimal order quantity and total annual cost