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Inventory Policies

3. The company is considering the previous policy on inventory. Management estimates the carrying cost of inventory to be $65.00 per unit. However, the sales department is complaining that the company is losing money by having inadequate inventory levels. They have provided you with the following information.

Safety stock of zero, the current situation, costs $40,000 of profits.

Safety stock of 400 units would reduce this cost to $10,000.

Should the company change policy on safety stocks? Why?

Solution Preview

There are two situations, one with safety stock and other without safety stock.

Average inventory = (EOQ)/2 + safety stock

Situation 1: No safety stock
Average inventory = (EOQ)/2 + safety stock
= (EOQ)/2

Situation 2: safety stock = 400 units
Average inventory = (EOQ)/2 + ...

Solution Summary

Solution contains calculations of average inventory .