Gartner Manufacturing Inc. purchases a component from a Malaysian supplier. The demand for that component is exactly 70 units each day. The company is open for business 250 days each year. When the company reorders the product, the lead time from the supplier is exactly 10 days. The product costs $14.00. The company determined that its inventory carrying cost is 20%. The company's order cost is $30.00.
-What is the annual order cost?

Question

Quizplus · Accepted Answer

The annual order cost is the order cost multiplied by the number of orders placed in a year. The number of orders placed in a year is the demand divided by the order quantity. The order quantity is the square root of the product of the demand and the lead time multiplied by two. The order cost is $30.00. The demand is 70 units per day. The lead time is 10 days. The order quantity is 70 units per day * 10 days = 700 units. The number of orders placed in a year is 70 units per day * 250 days per year / 700 units = 25 orders per year. The annual order cost is $30.00 * 25 orders per year = $750.00.