Question

Eagle Insurance is a large insurance company chain with a central inventory operation. The company’s fastest-moving inventory item has a demand of 80,000 units per year. The cost of each unit is $200, and the inventory carrying cost is $15 per unit per year. The average ordering cost is $60 per order. It takes about 2 days for an order to arrive. This is a corporate operation, and there are 250 working days per year. (Please show all work including formulas used)

a) What is the EOQ for this item?

b) What is the average inventory level of the item if the EOQ is used?

c) What is the optimal number of orders per year?

d) What is the optimal number of days in between two consecutive orders (i.e., cycle length)?

e) What is the total annual cost of ordering and holding inventory when the EOQ is used?

f) What is the total annual cost, including cost of the terms, when EOQ is used?

g) What is the reorder point for the item when EOQ is used?

h) What is the safety stock level if the company uses a reorder point of 750 units and uses an order quantity equal to the EOQ?

i) Suppose that the ordering cost is not $60, and Eagle has been ordering 1,000 units each time an order is placed. For this order policy (of Q=1,000), to be optimal, determine what the order cost would have to be.

Answer 1