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Calculating the inventory costs and optimal reorder point

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A wholesale distributor stocks and sells low flow toilets to contractors for use in commercial office buildings. 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. Answer questions 1-5 based upon the preceding information regarding the distributor's current ordering model.

1. What is the average number of units in inventory based upon ordering 250 units each time an order is placed?

2. How many orders per year will be necessary based upon ordering 250 units each time an order is placed?

3. What is the average dollar value of inventory based upon ordering 250 units each time an order is placed?

4. What is the total annual cost (Purchase Cost + Ordering Cost + Holding Cost) based upon ordering 250 units each time an order is placed?

5. What is the optimal reorder point based upon ordering 250 units each time an order is placed?

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Solution Summary

Solution depicts the steps to estimate the inventory costs in the present ordering policy. It also calculates the reorder point.

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1. What is the average number of units in inventory based upon ordering 250 units each time an order is placed?

Order quantity=250
Average inventory=order quantity/2=250/2=125

2. How many orders per year will be necessary based upon ordering 250 units each time an order is placed?

Number ...

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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