Question

Barbara Bright is the purchasing agent for West Value Company. West Valve sells industrial values and fluid control devices. One of the most popular values is the Western, which has an annual demand of 4,000 units. The cost of each value is $90, and the inventory carrying cost is estimated to be 10% of the cost of each value. Barbara has made a study of the costs involved in placing an order for any of the values that West Valve stocks and she has concluded that the average ordering cost is $25 per order. Furthermore, it take about two weeks for an order to arrive from the supplier, and during this time the demand per week for West values is approximately 80.

a) What is the EOQ?
(b) What is the ROP?

Answer 1

EOQ = 149.07 units

Re-order Point (ROP) = 160 units

Step-by-step explanation:

The Economic Order Quantity (EOQ) is the order size that minimizes the balance of ordering cost and holding cost. At the EOQ, the carrying cost is equal to the holding cost.

It is computed using he formulae below

EOQ = √ (2× Co× D)/Ch

EOQ = √ (2× 25× 4000)/(10%× 90)

EOQ = 149.07 units

Re-order Point (ROP)

The level of stock at which are replenishment order will be placed

Maximum consumption × maximum lead time

= 80× 2 = 160 units