INVENTORY MANAGEMENT

Question 1

ABC Ltd is expecting demand for its product this year to be 120,000 units. It has calculated its ordering cost to be $400 per order and carrying cost per year to be $5 per unit. The purchase lead time is 3 weeks. Assume 52 weeks per year.

PART A

a)Calculate the economic order quantity

EOQ = square root of [(2 x demand x cost per order) / annual carrying cost per unit)]

b)Calculate the number of orders to be placed each year

[Number of orders = demand / EOQ]

c)Calculate the reorder point

[Reorder point = number of units sold per unit of time x purchase order lead time]

PART B:

a)If the company reduces its ordering cost to $180 per order, calculate the new economic order quantity. Explain why it has changed.

b)If the company experiences an increase in the carrying cost per year to $12 per unit, calculate the new economic order quantity. Assume order cost goes back to original $400 per order. Explain why it has changed.