Question

ABC Hardware store is open for business 350 days a year. Annual demand for a power cutter at this store is 700 units. Replenishment cost is $15 per order, and annual inventory holding cost is 10% of the inventory value. ABC pays $20 for each power cutter. What is the economic order quantity for this cutter, and what is the reorder point if the lead time is 5 days and ABC policy is to keep a safety stock of 10 units?

Answer 1

102.47 and 20

Step-by-step explanation:

What is economic order quantity?

EOQ or the economic order quantity is the level of inventory which is the most optimal level for reducing inventory costs. It assumes that the supplier will supply as and when required and follows a just in time policy.

Now that we are familiar with the concept, let's recall the formula:

EOQ= SQRT( 2* D *k /h)

D - Annual demand, which is 700

k - Replenishment cost, which is $15

h - holding cost, which is 10% of inventory value = 0.1 × $20 = $2

So, EOQ = SQRT(2 * 700 * 15/2) = 102.47 units

Reorder point = daily demand * lead time + safety stock = 700/365*5+10=20 Units