Mungo Pet Supplies makes cat trees for several pet store chains. They order rolls of carpet (used to cover the trees) from a supplier. Mungo's management has decided to use an EOQ model. The annual demand for carpet is estimated to be 1,000 rolls. The purchase price per roll is $20 and estimated inventory carrying cost rate is 25%. The cost to place an order from the supplier is $30. What is the average inventory amount that Mungo can expect to hold at any one time?

Question

Quizplus · Accepted Answer

The EOQ model calculates the optimal order quantity to minimize total inventory costs. The average inventory is half of the EOQ, which is calculated using the formula: EOQ = sqrt((2 * Demand * Order Cost) / Carrying Cost Rate). Here, EOQ = sqrt((2 * 1000 * 30) / (0.25 * 20)) = 109.5. The average inventory is half of EOQ, which is 54.7.

Mungo Pet Supplies Makes Cat Trees for Several Pet Store