Question

SS LIMITED Inventory Cost Management
		Annual Holding Cost / unit	Total Holding Cost / Buffer Stock	Total Holding Cost / Orders	Fixed Cost / order	Total Ordering Cost / Orders	Total Cost	Saving by Economic Order Quantity
Annual Consumption, units	1,800,000	£1.50			£37.50
Quantity per Order, units	50,000		£42,000.00	£37,500.00		£1,350.00	£80,850.00
Economic Order Quantity, units	9,487		£42,000.00	£7,115.25		£7,115.00	£56,230.25	£24,619.75
Buffer Stock, units	28,000
Weekly Demand, units	36,000
Lead Time, weeks	2
Reorder Level	100,000							Analyzing the validity of the optimal quantity for orders:

Answer 1

SS limited has the reorder level of inventory of 100000 units and the consumption of units for the year is 1800000 units. So the minimum order level is 100000 units and the maximum order is 1800000 units:

The cost per order for minimum level of Inventory of 100000 units:

The buffer stock holding cost: $ 42000

Additional holding cost : $75000($37500 for 50000 units. So the cost per unit is $ 0.75)

Order cost per order $1350: (Here i assumed that the no.of units per order increase the ordering cost per unit decrease as per the given information. So i have taken the same cost per order for every case.

Total cost for order for 100000 units is 118350. and the number of orders are 18 then total cost is 2130300 and The annual holding cost is $2700000 (1800000*1.50)

So it is not preferable to hold annual consumption at a time and the number of orders decrease the cost is also less. So the optimal order for 3 times 600000 units per order and the cost per order is $ 493350 and for 3 orders $ 1480050