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Calculating EOQ and inventory costs

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The president of the wholesale distributor has recently heard about the EOQ model and is interested in learning whether or not using this model would allow the company to reduce its annual costs by optimizing the number of orders placed each year and the number of toilets purchased in each order. The estimated annual demand for the toilets is 4,475 units. The estimated average demand per day is 15 units. The purchase cost from the toilet manufacturer is $125.00 per unit. The lead time for a new order is 4 days. The ordering cost is $110.00 per order. The average holding cost per unit per year is $1.85. The distributor has traditionally ordered 250 units each time they placed an order.

1. What is the economic order quantity (EOQ) that will minimize inventory costs?
2. What is the average number of units in inventory based upon ordering using the EOQ?
3. What is the average dollar value of inventory based upon ordering using the EOQ?
4. What is the total annual cost (Purchase Cost + Ordering Cost + Holding Cost) based upon using the EOQ?
5. What is the optimal reorder point based upon using the EOQ?
6. How many orders per year will be necessary based upon using the EOQ?

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Solution Summary

Solution describes the steps to calculate EOQ, inventory costs and reorder point in the given case.

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1. What is the economic order quantity (EOQ) that will minimize inventory costs?
D =Total demand= 4475 units per year
S = ordering cost=$110 per order
H = holding costs=$1.85 per unit per year
EOQ=(2DS/H)^0.5=(2*4475*110/1.85)^0.5=729.49 or say 729 units

2. What is the average number of units in inventory ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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