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 total annual inventory cost?

Question

Quizplus · Accepted Answer

The total annual inventory cost includes the ordering cost and the carrying cost. The Economic Order Quantity (EOQ) formula is used to minimize these costs. The EOQ is calculated as √((2DS)/H), where D is the annual demand (70 units/day * 250 days = 17,500 units), S is the order cost ($30), and H is the carrying cost per unit per year (20% of $14 = $2.80). The EOQ is approximately 500 units. The number of orders per year is D/EOQ = 17,500/500 = 35. The total ordering cost is 35 * $30 = $1,050. The average inventory is EOQ/2 = 250 units, and the carrying cost is 250 * $2.80 = $700. The total annual inventory cost is $1,050 + $700 = $1,750.