Question

Ray’s Satellite Emporium wishes to determine the optimal order size for its best-selling satellite dish (Model TS111). Ray has estimated the monthly demand for this model to be 489 units. This model costs Ray $139 to purchase from his supplier. His annual cost to carry inventory is 23% and he estimates that orders cost $42 to process.

What is the optimal order quantity?

Ray’s Satellite Emporium wishes to determine the optimal order size for its best-selling satellite dish (Model TS111). Ray has estimated the monthly demand for this model to be 231 units. This model costs Ray $174 to purchase from his supplier. His annual cost to carry inventory is 24% and he estimates that orders cost $31 to process.

On average, how many satellite dishes are in inventory?

Ray’s Satellite Emporium wishes to determine the optimal order size for its best-selling satellite dish (Model TS111). Ray has estimated the monthly demand for this model to be 463 units. This model costs Ray $383 to purchase from his supplier. His annual cost to carry inventory is 10% and he estimates that orders cost $31 to process.

What is the annual cost of placing orders for these satellite dishes?

Ray’s Satellite Emporium wishes to determine the optimal order size for its best-selling satellite dish (Model TS111). Ray has estimated the monthly demand for this model to be 461 units. This model costs Ray $88 to purchase from his supplier. His annual cost to carry inventory is 25% and he estimates that orders cost $30 to process.

What is the total annual cost of holding and ordering these satellite dishes?

Ray’s Satellite Emporium wishes to determine the optimal order size for its best-selling satellite dish (Model TS111). Ray has estimated the monthly demand for this model to be 433 units. This model costs Ray $398 to purchase from his supplier. His annual cost to carry inventory is 17% and he estimates that orders cost $43 to process.

If Ray used an order quantity of 2000 instead of the optimal order quantity, how much money would he be wasting each year?

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.