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Inventory Management - Ordering and Inventory

The Bozo Co is reviewing their inventory management techniques and have come up with the following data on their inventory.

a. annual usage of units $125,000
b.ordering costs if $100 per order
c. carrying cost of 20% of the cost of inventory
d. cost of one unit $110

1. what is the economic ordering quantity?
2. how many orders will be placed during the year?
3. what will the average inventory be?
4. what is the total cost of inventory expected to be?
If the company can reduce the ordering costs by $12.50 by the use of automation and the carrying cost by 25% by reduction of insurance costs, what would the answers be to the above questions?

Solution Preview

Annual usage/demand, A = $125,000 (in terms of $) convert this into units
A = $125,000/price per unit = $125,000/$110 = 1136.37 ~ 1137

Cost per unit, P = $110
Ordering cost, S = $100 per order
Holding cost rate, c = 20% per annum

Inventory carrying cost, I = price per unit*holding cost rate = $110*20% = $22 per unit per ...

Solution Summary

Solution shows calculations of:
1. Economic ordering quantity
2. Number of orders.
3. The average inventory
4. Total cost of inventory