Question

Fancy-Bike Manufacturing needs 100,000 units of bicycle tires for its production of beach bikes per year. The carrying costs of these tires are $10 per unit per year and the fixed ordering cost is $400. What is the optimal number of units Fancy-Bike should order each time in order to minimize total inventory cost? At this optimal quantity, how often should Fancy-Bike order its bicycle tires? Assume a 365-day year.

Answer 1

The optimal number of units are computed as shown below:

= [ (2 x Number of units per year x ordering cost) / carrying cost per unit ] ^0.50

= [ (2 x 100,000 x $ 400) / $ 10 ] ^0.50

= 2,828.427125 units

The number of orders in a year is computed as follows:

= 100,000 / 2,828.427125

= 35.35533906

So, the number of days in which the firm shall order its tyres will be as follows:

= 365 days / 35.35533906

= 10.32 days Approximately

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