Exhibit 28.2
Cartwright Computing expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying costs is equal to 20 percent of the purchase price. (Assume a 360-day year.)
-Refer to Exhibit 28.2.If Cartwright holds a safety stock equal to a 30-day supply of chips,what is its average inventory level?
A) 12,088
B) 3,175
C) 15,750
D) 13,675
E) 8,124

Question

Quizplus · Accepted Answer

First, we need to calculate the Economic Order Quantity (EOQ) using the formula:

EOQ = √(2DS/H)

Where:
D = Annual demand = 126,000
S = Ordering cost = $200
H = Holding cost = 20% of $25 = $5

EOQ = √(2 × 126,000 × $200/$5) = 4,487.16

Next, we need to calculate the reorder point, which is the level of inventory at which we need to place an order to avoid stockouts during lead time. The lead time in this case is not given, so we assume it to be zero. Therefore, the reorder point is:

Reorder point = Safety stock + (Demand during lead time) = 30 × (126,000/360) = 10,500

Finally, we can calculate the average inventory level as:

Average inventory level = EOQ/2 + Safety stock = 4,487.16/2 + 10,500 = 12,088

Therefore, the answer is A) 12,088.

Exhibit 28.2 Cartwright Computing Expects to Order 126,000 Memory Chips for Inventory