Answer a:
EOQ = SQRT (2 * Annual Demand in units * Order cost / Carrying Cost)
= SQRT (2 * 631 * $41 / $4)
= 113.73
EOQ = 113.73 or 114 units
Answer b:
Average Inventory = Minimum Level + EOQ/2 = 10 * 631/365 + 113.73 / 2 = 74.15 or 74 units
Answer c:
Reorder level or Ordering level = Safety stock + Lead time consumption
Safety stock = (Annual Demand/365) x 10 days = 631 /365 *10 = 17.288 units
Lead time consumption = Lead time * Daily usage = 5 * 631/365 = 8.644 units
Reorder level or Ordering level = 17.288 + 8.644 = 25.93 units
Reorder level = 25.93 or 26 units
Answer d:
Variables that will change if firm does not hold safety stock:
(2) Carrying cost
(3) Total Inventory cost
(4) Reorder point
Explanation:
Carrying cost = Average inventory * carrying cost per unit.
Average inventory includes safety stock.
Total inventory costs includes carrying cost
Reorder point = Safety stock + Lead time consumption
If safety stock = 0, then Reorder point = Lead time consumption
EOQ, reorder point, and safety stock Alexis Company uses 631 units of a product per year...
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