Question

HighLife corporation has the following information:

Average demand = 30 units per day

Average lead time = 40 days

Item unit cost = $45 for orders of less than 400 units

Item unit cost = $40 for orders of 400 units or more

Ordering cost = $50

Inventory carrying cost = 15%

The business year is 300 days

Standard deviation of demand during lead time = 90

Desired service level = 95%

What is the TAC at $40/unit?

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.