Cynthia Korinsky,manager of a large medical supply house that operates 50 weeks per year and five days per week,has decided to implement a periodic review system for all class A SKUs.One such SKU has the following characteristics: Demand = 10,000 units per year (or 40 units per workday)Order cost = $50 per order
Holding cost = $5 per unit per year
If Korinsky wishes to minimize total cost (thereby approximating the EOQ),the number of workdays between orders (or P),should be:

Question

Quizplus · Accepted Answer

We can use the following formula to calculate the total cost of inventory:

Total Cost = Ordering Cost + Holding Cost

The optimal ordering quantity (EOQ) for this SKU can be calculated using the following formula:

EOQ = sqrt((2 x demand x order cost) / holding cost)

EOQ = sqrt((2 x 10,000 x $50) / $5) = 1,000 units

The time between orders (P) can be calculated by dividing the number of workdays per year by the demand per workday, and then dividing the EOQ by this value:

P = (50 x 5) / 40 = 6.25 days

P = EOQ / demand per day = 1,000 / 40 = 25 days

Therefore, the optimal time between orders is somewhere between 6.25 and 25 days. Since we must choose one of the given options, we can eliminate options A and D. Option C is also unlikely because it exceeds the usual range for P. Therefore, option B is the best choice.

Cynthia Korinsky,manager of a Large Medical Supply House That Operates