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1) Appliance for Less is a local appliance store
1) Appliance for Less is a local appliance store. It costs this store $21.62 per unit annually for storage, insurance, etc., to hold microwave in their inventory. Sales this year are anticipated to be 639 units. Each order costs $69. The company is using Economic Order Quantity model in placing the orders. What is the average inventory held during the year including safety stock if the store insists on a 3 days safety stock (assume 365 days a year)?
2) Cheeseburger and Taco Company purchases 14,922 boxes of cheese each year. It costs $14 to place and ship each order and $3.83 per year for each box held as inventory. The company is using Economic Order Quantity model in placing the orders.
What is the annual total inventory management costs of cheese inventory.
Expert Solution
1) Computation of the average inventory:-
Economic order quantity = (2*Annual demand*Order cost/Carrying cost per order)^(1/2)
= (2*639*69/21.62)^(1/2)
= 4078.72^(1/2)
= 63.86
Safety stock = (Annual demand/365)*Number of days of safety stock
= (639/365)*3
= 5.25
Average inventory =(Economic order quantity/2)+Safety stock
= (63.86/2)+5.25
= 31.93 + 5.25
= 37.18 units Or 37 units
2) Computation of the annual total inventory management costs:-
Economic order quantity = (2*Annual demand*Cost per order/Carrying cost)^(1/2)
= (2*14922*14/3.83)^(1/2)
= $109,090.34^(1/2)
= 330.29 boxes
Annual ordering cost = (Annual demand/Economic order quantity)*Cost per order
= (14922/330.29)*$14
= 45.18*$14
= $632.50
Annual storage cost = (Economic order quantity*Carrying cost per unit)/2
= (330.29*$3.83)/2
= $632.50
Annual total inventory cost = Annual ordering cost + Annual storage cost
= $632.50 + $632.50
= $1,265.00
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