BEC - 9

Question 1

Total inventory administrative cost =

Answer 1

Total order costs + total carrying costs

Question 2

Economic Order Quantity (EOQ)

Answer 2

Determines the order size that minimizes total inventory and administrative costs.

Question 3

Economic Order Quantity Formula

Answer 3

[(T/Q) x O] + [(Q/2) x C]

rearranged:

TC = (T x O / Q) + (Q x C)/ 2 or

EOQ = sqrt (2 TO / C)

Question 4

Total Order Cost

Answer 4

(T / Q ) * O

T = total units
Q = Order size quantity
O = Per order cost

Question 5

Carrying Cost

Answer 5

Average Inventory x Per unit Carrying Cost

or = (Order size quantity/2)* Per unit Carrying Cost

or = (Q/2) * C

Question 6

EOQ Example

T = 10,000 units
O = $100.00
C = $2 / unit

Answer 6

EOQ = sqrt(2 x 10,000 x 100/2)
= sqrt(1,000,000)
= 1,000

Question 7

EOQ Assumptions

Answer 7

• Demand is constant during the period
• Unit cost and carrying costs are constant during the period
• Delivery is instantaneous

Question 8

Reorder Point

Answer 8

Inventory quantity at which goods should be reordered

Question 9

Reorder Point =

Answer 9

Delivery time stock + safety stock

Question 10

Reorder Point Example

Annual use equally over 50 wks = 300,000 units
Delivery time = 2 weeks
Safety stock = 1,000 units

Answer 10

300,000 units / 50 weeks = 6,000 units / wk

6,000 units x 2 weeks = 12,000 units delivery time + 1,000 units safety stock = 13,000 units = Reorder point

Inventory should be reordered when it drops to 13,000 units on hand