A company is planning to purchase 90 800 units of a particular item in the year ahead. The item is purchased in boxes, each containing 10 units of the item, at a price of £200 per box.
A safety stock of 250 boxes is kept.
The cost of holding an item in stock for a year (including insurance, interest and space costs) is 15 per cent of the purchase area. The cost of placing and receiving orders is to be estimated from cost data collected relating to similar orders, where costs of £5910 were incurred on 30 orders. It should be assumed that ordering costs change in proportion to the number of orders placed. 2 per cent should be added to the above ordering costs to allow for inflation.
Calculate the order quantity that would minimize the cost of the above item, and determine the required frequency of placing orders, assuming that usage of the item will be even over the year.