Question

You’ve recently been hired as a project manager at a distributor of fruits and vegetables located in Northern Kentucky. An operations manager has asked for your help in analyzing current inventory policies related to packing crates. She’s looking for a lower cost policy.

Currently, the operation buys crates from a regional supplier. The operation uses 2400 crates each month. Annual carrying cost is 18% of the $6 acquisition cost per crate. Each order costs approximately $40. Crate supplier lead time is 5 days. Currently, the operation orders crates every two months.

You’ve been asked to develop a lower cost alternative to the existing crate inventory policy.

Question 1

Currently, the operation orders ____ crates at a time.

a. 3,600

b. 2,400

c. 28,800

d. 1,800

e. 4,800

Question 2

The EOQ for crates is approximately:

a. 518

b. 1,461

c. 2,958

d. 1,265

e. 1,155

Question 3

The total annual cost of the EOQ policy is about ____ the current policy.

a. about $198 lower than

b. about $1,255 lower than

c. about $818 lower than

d. the same as

e. $4200 higher than

Question 4

The reorder point for the EOQ policy is approximately:

a. 395 crates

b. 296 crates

c. 474 crates

d. 49 crates

e. 250 crates

Question 5

Compared to the existing policy, the EOQ policy would require ordering more often.

a. True

b. False

Answer 1

Economic Order Quantity is the number of unit that is added to the inventory which minimize the total inventory cost. It maintain a balance between ordering costs and carrying costs.