Fisk Corporation is trying to improve its inventory control system and has installed an online...

Question:

Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 54,000 units per year, an ordering cost of $3 per order, and carrying costs of$1.60 per unit.

a) What is the economic ordering quantity?

b) How many orders will be placed during the year?

c) What will the average inventory be?

d) What is the total cost of ordering and carrying inventory?

Economic Order Quantity:

For a firm, the economic order quantity is the optimum quantity for which the total cost consisting of the inventory cost and the ordering cost turns out minimum. The total ordering cost depends on the number of orders placed while the total inventory carrying cost depends on the average inventory held at any point of time.

a. Economic Order Quantity (EOQ)

EOQ is given by the formula,

{eq}EOQ = \sqrt{\frac{2 * O * D}{C}} {/eq}

where, O = cost of placing one order = $3, D = annual demand (units) = 54,000 units & C = annual carrying cost per unit =$1.60

On putting all these values in the formula, we get,

EOQ = 450 units

b. Nos. of orders during the year (N)

• = Annual demand / EOQ
• {eq}= \dfrac{54,000}{450} {/eq}
• = 120 nos. of orders

c. Average Inventory (I)

• = EOQ / 2
• {eq}= \dfrac{450}{2} {/eq}
• = 225 units

d. Total Ordering cost and Carrying cost as per EOQ policy

Total annual ordering cost

• = Order cost per order * Nos. of orders
• = $3 * 120 • =$360

Total annual carrying cost

• = Carrying cost per unit per year * avg. inventory
• = $1.60 * 225 • =$360