Big Toy, Inc. annually sells 100,000 units of Big Blobs. Currently, inventory is financed through the use of commercial bank loans. Big Toy pays $12.20 per Big Blob. The cost of carrying this inventory is $3.20 per unit while the cost of placing an order involves expenses of $400 per order.
Since Big Blobs are imported, delivery is generally 20 days but may be as long as 30 days. In order to manage inventory more efficiently, the management of Big Toy, Inc. has decided to use the EOQ model plus a safety stock to determine inventory levels.
a. What is the economic order quantity?
b. Today is January 1 and the current level of inventory is 10,000 units; when should the first order be placed based on the economic order quantity?
c. Management always wants sufficient Big Blobs so that they never are out of stock. If management considers late deliveries to be the prime reason for being out of stock, what should be the safety stock?
d. According to the above analysis, what are the maximum inventory, the minimum inventory, and the average inventory?
e. If sales of Big Blobs double, will the average inventory also double?