Question

Daily sales 325 units Std. deviation of daily demand 39 Cost to place an order $30 Freight cost $250 Avg. Inventory (last 12 months) 2,750 units Cost of 1 unit of inventory $125 Cost of Goods Sold $14,828,125 Selling price of 1 unit $250 Avg. replenishment cycle 11 days Average inventory value $343,750 Re-stock fee is $55 Cost of capital = 22.5% Inventory Risk = 1.5% Storage space 5.5% =0.75% Insurance Current number of warehouses = 24 Prime interest rate 3.9% Taxes 1.25% Average annual depreciation 15.5% Std. dev. of replenishment cycle 3 days Forecast error 12.5% Days in a year 365 1. What is the ICC%? 31.3% (to the nearest tenth of a percent) 2. What is the value of R? 11525 (in the EOQ formula) 3. What is the value of V? 4. What is the value of S? (to the nearest cent) What is the value of Q? 5. 6. If the company plans to close 12 of their warehouses over the next 12 months, how much inventory should they expect to have a year from now? 7. How much safety stock should the company hold if it wants to ensure a 98.3% service level?

Answer 1

Note :	Following calculations are made on the basis of best assumptions can be made as per the information provided in given problems. The answer might be different as answers provided by other expert on the basis of different assumptions taken by other expert.
Ans-1	Inventory carrying cost (=22.5+1.5+5.5+0.75+1.25)	31.50%
Ans-2	Demand in units (R )- 325*365	118625
Ans-3	As per given information
	Q=√2RS/H
	where:
	Q=EOQ units
	R=Demand in units (typically on an annual basis)	118625	units
	S=Order cost (per purchase order)	30	$
	ICC(H)=Holding costs (per unit, per year)	39.125	$
	Q=√2RS/H
	=	427
	Hence, Total Relevant cost = Q/2*H    +   R/Q*S
	=Q/2	213
	=R/Q	278
	Total relevant cost =	16687
	Hence, in given situation we assume that "V"denotes for Value of variable cost which is total relevant cost
	Therefore, V (Total relevant cost)=	16687
Ans-4	Value of "S" Means total order cost of purchase which is (S*Q)	12796
Ans-5	Value of EOQ i.e. Q =Q*Cost per unit of inventory	53315
Ans-6	Since company has total 24 warehouses and average inventory for last 12 months is 2750 units
	Therefore while warehouses reduces average inventory shall decrease accordingly, hence inventory that should be expected to have a year from now is :
	= 12/24   *2750
	=1375
Ans-7	Safety stock level
	= (Maximum usage × Maximum lead time) – (Average usage × Average lead time)
	=(325*(11+3))-(((2750*12)/365)*11)
	=3555
	When 98.3% service level then Safety stock level shall be :
	=3555*98.3%
	=3495
	Note: Amount or unit rounded off nearest to 1