really isn't an asset, but rather a liability. Consequently, the average amount of inventory that these fir.ms have on hand relative to their annual sales has been going down in recent years. even though in many cases the number of products they make has increased. Firms have been able to reduce their inventories for several reasons.First, companies ave focused their efforts on reducing setup or order costs. The lower these costs, the smaller the economic order quantities. In addition, companies are working much closer now with their vendors. Through these relationships, product throughput times and thus lead times have been reduced significantly, again reducing the need to carry inventory. Finally, through advances in technology. many companies, like Dell Computer, are now building to order rather than to stock. thereby totally eliminating finished goods inventories.
Items purchased from a vendor cost $20 each, and the forecast for next year's demand is
1,000 units. If it costs $5 every time an order is placed for more units and the carrying cost
is $~ per unit per year, what quantity should be ordered each time?
a. What is the total ordering cost for a year?
b. What is the total carrying cost for a year?
The quantity to be ordered each time is
EOQ = H = 4 = 50 umts
a. The total ordering cost for a year is
D S = 1,000 ($5) = $100
A department store sells (among other things) sports shirts for casual wear. Mr. Koste is in
charge of the men's department, and knows that the annual demand for one of these shirts
is fairly constant at 250 shirts per year. These shirts are obtained only from the manufacturer,
who charges a delivery fee of S65, regardless of the number of shirts delivered with
that order. In addition, in-house costs associated with each order total $6.
The manufacturer Charges S16.25 per shirt, but is willing to lower the price by 3 percent
per shirt if the department store \ ill order at least 2 gross (288) each time. Of course, this
means that some shirts must be kept in inventory, and the holding costs have been estimated
at 8.5 percent per year. . Should Mr. Koste recommend that the department store accept the offer of the quantity