A two bin approach is used to control inventory for a certain low cost hardware item. Each bin holds 500 units of the item. When one bin becomes empty, an order for 500 units is released to replace the stock in that bin. The order lead time is slightly less than the time it takes to deplete the stock in one bin. Accordingly, the chance of a stock-out is low and the average inventory level of the item is about 250 units, perhaps slightly more. Annual usage of the item is 6000 units. Ordering cost is $40.
(a) What is the imputed holding cost per unit for this item, based on the data given?
(b) If the actual annual holding cost per unit is 5 cents, what lot size should be ordered?
(c) How much does the current two bin approach cost the company per year, compared to using the economic order quantity?