Question

An office suppliers distributor uses a continuous review inventory control system for one of its SKUS. The following information is available on the item.

Order cost $60/order
Unit cost = $300
Holding cost rate = 40%/year
Number of working days per year = 300
Demand 2500 chairs/year
Standard deviation of daily demand = 2.5 chairs
Average lead time = 4 days
Required cycle-service level= 90%
What is the economic order quantity?

Answer 1

Using the EOQ formula with the given Demand, Order cost, and calculated Holding cost ($120 per unit per year), the economic order quantity for chairs is determined to be 50 chairs per order.

Step-by-step explanation:

To calculate the Economic Order Quantity (EOQ) for an office supplier's chairs, we use the EOQ formula:

EOQ = √((2*D*S)/H)

Where:

• D represents the Demand (2500 chairs/year).
• S is the Order cost ($60/order).
• H is the Holding cost per unit per year (40% of Unit cost).

Calculating H:

H = Holding cost rate * Unit cost
= 0.40 * $300
= $120 per unit per year

Now, applying the values to the EOQ formula:

EOQ = √((2*2500*60)/120)
= √((5000*60)/120)
= √(2500)
= 50 chairs

Therefore, the economic order quantity is 50 chairs per order.