Question

Barbara Bright is the purchasing agent for West Valve Company. West Valve sells industrial valves and fluid control Devices. One of the most popular valves is the Western, which has an annual demand of 4,000 units. The cost of each valve is $90, and the inventory carrying cost is estimated to be 10% of the cost of each valve. Barbara has made a study of the costs involved in placing an order for any of the valves that West Valve stocks, and she has concluded that the average ordering cost is $25 per or- der. Furthermore, it takes about two weeks for an order to arrive from the supplier, and during this time the demand per week for West valves is approximately 80. a) What is the EOQ? (b) What is the ROP? c) What is the average inventory? What is the annual holding cost? (d) How many orders per year would be placed? What is the annual ordering cost?

Answer 1

EOQ 149 units

ROP 160 units

average inventory 80 units

holding cost $720

orders per year 25

ordering cost $625

Step-by-step explanation:

`Q_(opt) = \sqrt{(2DS)/(H)}`

D = annual demand 4,000

S= setup cost = ordering cost 25

H= Holding Cost 9.00

EOQ = 149

lead time: 2 weeks

ROP: annual demand x lead time/year

ROP: 80 units per week x 2 = 160

As the ROP is greater than EOQ the company's inventory will be his ROP

meaning it will order as soon as a new order arrives.

average inventory ROP/2 = 160/ 2 = 80

annual holding cost: 80 units on average x 9 dollars each = 720

order per year: 4.000 / 160 = 25

total ordering cost: 25 orders x 25 dollars each: 625