The Trektronics store begins each week with 260 phasers in stock. This stock is depleted each...

Question:

The Trektronics store begins each week with 260 phasers in stock. This stock is depleted each week and reordered. The carrying cost per phaser is $27 per year and the fixed order cost is $54.

a. What are the current total carrying costs?

b. What are the current restocking costs?

c. What is the economic order quantity?

d. Should Trektronics increase or decrease its order size?

e. How many orders per year will Tektronics place under the new policy?

Economic Order Quantity (EOQ):

The economic order quantity is an optimal quantity per order in the inventory management model. This optimal quantity per order minimizes the total cost of inventory, which is the sum of the carrying cost and reordering cost.

Answer and Explanation:

a. Total carrying cost = carrying cost per phaser * average inventory per week = 27 * (260 / 2) = 3,510

b. Restocking cost = number of orders per year * cost per order = 52 * 54 = 2,808

c. The economic order quantity is given by the following formula:

  • economic order quantity = {eq}\displaystyle \sqrt{\frac{2DK}{H}} {/eq}

where {eq}D{/eq} is annual demand, {eq}K{/eq} is ordering costs and {eq}H{/eq} is holding costs.

Applying this formula, the economic order quantity in this question is:

  • {eq}\displaystyle \sqrt{\frac{2*260*52*54}{27}} = 232 {/eq}

d. Currently, they are ordering 260 each week, which is higher than the economic order quantity. Therefore, they should reduce the order size.

e. Number of order per year = 260 * 52 / 232 = 58


Learn more about this topic:

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What Is Inventory Management? - Demand vs. Cost

from Business 112: Operations Management

Chapter 13 / Lesson 3
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