Calculating EOQ, ROP, ordering cost and inventory cost

Ross White's machine shop uses 2,500 brackets during the course of a year, and this usage is relatively constant throughout the year. These brackets are purchased from a supplier 100 miles away for $15 each, and the lead time is 2 days. The holding cost per bracket per year is $1.50 (or 10% of the unit cost) and the ordering cost per order is $18.75.

There are 250 working days per year.

(a) What is the EOQ?
(b) Given the EOQ, what is the average inventory? What is the annual inventory holding cost?
(c) In minimizing cost, how many orders would be made each year? What would be the annual ordering cost?
(d) Given the EOQ, what is the total annual inventory cost (including purchase cost)?
(e) What is the time between orders?
(f) What is the ROP?

Solution Preview

(a) What is the EOQ?
D =Total demand= 2500 units per year
S = ordering cost=$18.75 per order
H = holding costs=$1.50 per unit per year
P = Item purchase price = $15.00 per unit
EOQ=(2DS/H)^0.5=(2*2500*18.75/1.5)^0.5=250 units

(b) Given the EOQ, what is the average inventory? What is the annual inventory holding cost?
Average ...

Solution Summary

Solution describes the steps to calculate EOQ, ROP, ordering cost and inventory cost.

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