Question

A jewelry firm buys semiprecious stones to make bracelets and rings. The supplier quotes a price of $8.6 per stone for quantities of 600 stones or more, $9.5 per stone for orders of 400 to 599 stones, and $10 per stone for lesser quantities. The jewelry firm operates 183 days per year. Usage rate is 25 stones per day, and ordering costs are $48.

a.	If carrying costs are $2 per year for each stone, find the order quantity that will minimize total annual cost. (Round your intermediate calculations to the nearest whole number.)

Order quantity

stones

b.	If annual carrying costs are 25 percent of unit cost, what is the optimal order size? (Round your intermediate calculations to the nearest whole number.)

Optimal order size

stones

c.	If lead time is 5 working days, at what point should the company reorder? (Round your intermediate calculations to the nearest whole number.)

Reorder quantity

stones

Answer 1

Economic Order Quantity refers to the number of unit the company should add to the inventory and the order is made to minimize the total inventory cost. It maintain a balance between ordering costs and carrying costs. Reorder point is the level of inventory which the firm holds in stock and when the inventory level reach this point, the firm must reorder the item.

EOQ act as a review inventory system to monitor the inventory level continuously and once the level reaches the reorder point, a fixed quantity of order is placed. Thus EOQ helps in calculating reorder point and optimal reorder quantity to avoid shortage of inventory.