EOQ/Inventory costs
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Ardmore Farm and Seed has an inventory dilemma. It has been selling a brand of very popular insect spray for the past year. It has never really analyzed the costs incurred from ordering and holding the inventory and currently faces a large stock of the insecticide in the warehouse. Ardmore estimates that it costs $25 to place an order and $0.25 per gallon to hold the spray. The annual requirements total 80,000 gallons for a 365-day year.
a. Assuming that 10,000 gallons are ordered each time an order is placed, estimate the annual inventory costs.
b. Calculate the EOQ (economic order quantity)
c. Given the EOQ calculated in question b, how many orders should be placed and what is the average inventory balance?
d. If it takes seven days to receive an order from suppliers, at what inventory level should Ardmore place another order?
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Solution Summary
The solution explains how to calculate EOQ and inventory costs
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a. Assuming that 10,000 gallons are ordered each time an order is placed, estimate the annual inventory costs.
Annual inventory costs = Carrying costs + Ordering costs
Carrying costs -
Sinc 10,000 gallons are ordered, the average inventory would be 10,000/2=5,000 gallons. The carrying cost is $0.25 per ...
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