Settler Company sells a number of products to many restaurants in the area. One product is a special meat cutter with a disposable blade. Blades are sold in a package of 12 at $20 per package. It has been determined that the demand for the replacement blades is at a constant rate of 2,000 packages per month. The packages cost the company $10 each from the manufacturer and require a three-day lead time from date of order to date of delivery. The ordering cost is $1.20 per order, and the carrying cost is 10% per year. The company uses the economic order quantity formula.
Required:
(1) Compute the economic order quantity.
(2) Compute the number of orders needed per year.
(3) Compute the cost of ordering and of carrying blades for the year.
(4) Determine the number of days until the next order should be placed, assuming that there is no safety stock and that the present inventory level is 400 packages. (360 days = 1 year.)
(5) Discuss the difficulties that most firms have in attempting to apply the EOQ formula to their inventory problems.