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You are provided with the following information for a certain company, Annual demand=4000 units,cost per unit Ksh 200, cost of replacing an order 5000 annually. Inventory...

You are provided with the following information for a certain company,
Annual demand=4000 units,cost per unit Ksh 200, cost of replacing an order 5000 annually. Inventory carrying cost is expressed as a percentage of cost of average stock as 20%
Required
i)Determine EOQ
ii)Frequency of ordering
iii)When to order
iv)Total cost associated with the policy

Answers

Wulson
EOQ standing for economic order quantity refer to the quantity of units that a company will add to its inventory each time it orders in order to minimize the total cost associated with inventory comprising of the holding cost,shortage costs, carrying cost, ordering cost among other costs.
EOQ is calculated as follows;
EOQ= v[(2DS)/H] where D= annual demand
S= Fixed ordering cost
H= variable holding cost

i) Determine the EOQ

EOQ= v[(2DS)/H]
D= 4000 units
S= 5000
H= 20% of sh 200

= v[(2*4000*5000)/(20%*200)]
= v[40,000,000/40]
= v1,000,000
EOQ= 1,000 units


ii) Frequency of ordering
Annual demand= 4000 units
EOQ= 1000

4000/1000= 4 orders annually

12/4= 3

Ordering frequency is once very 3 months
PrimeTutor answered the question on September 19, 2018 at 11:54

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