Question

Following information in an inventory problem is available: Annual demand 8,400 units, Unit price $2.4 Ordering cost $4.0 Storage cost $ 2% Interest rate 10% p.a. Lead time 1/2 month Calculate EOQ, Reorder level and total annual inventory cost. How much does the total inventory cost vary if the unit price is changed to $5? (Hint: Variation in Inventory Cost = 42,201)​

Answer 1

The EOQ is approximately 830 units, the reorder level is approximately 350 units, and the total annual inventory cost is approximately $48.72. The variation in total inventory cost due to the change in unit price is approximately $36.43.

Step-by-step explanation:

To calculate the Economic Order Quantity (EOQ), we can use the formula:

EOQ = √((2 * Annual demand * Ordering cost) / Storage cost)

Given the information provided, EOQ = √((2 * 8400 * 4) / 0.02) = 830 units (approx.)

Reorder level = Lead time * Demand per period = (1/2) * 8400 / 12 = 350 units (approx.)

Total annual inventory cost = (EOQ / 2) * Storage cost + (Annual demand / EOQ) * Ordering cost = (830 / 2) * 0.02 + (8400 / 830) * 4 = $8.24 + $40.48 = $48.72 (approx.)

The variation in total inventory cost when the unit price is changed to $5 can be calculated as:

Variation in Inventory Cost = (New unit price - Old unit price) * (Annual demand / EOQ) * Ordering cost = ($5 - $2.4) * (8400 / 830) * 4 = $3.6 * 10.12 = $36.43 (approx.)