Question

RajDee Furniture Company (RFC) buys and sells office furniture. The company buys chairs from a manufacturer for $40 per unit. Order costs are $200 per order and there is a lead time of 10 days for each order to arrive from the manufacturer to RFC warehouse. Inventory carrying cost for RFC is 10%. Average yearly demand for the chairs is 40,000 units. Answer the following questions, assuming there is no uncertainty at all about the demand or the lead time. What would average inventory be if RFC orders this quantity every time

Answer 1

1,414 units

Step-by-step explanation:

First, we need to find the Economic oder quantity(EOQ), which is denoted by;

EOQ = √ 2 × A × O / C

Where,

A = Annual requirement = 40,000 units

O = Ordering cost = $200 per unit

C = Annual carrying cost per unit = 40 × 10% × 1/2 = 2.

EOQ = √ 2 × 40,000 × 200 / 2

EOQ = 2,828 units

Therefore, average inventory would be;

= EOQ / 2

= 2,828 / 2

= 1,414 units

Average inventory would be 1,414 units if RFC orders this quantity (2,828 units) every time.