Inventory Management – In-class Activity 1

1- 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 storage cost is $4
per unit per year,
a. What quantity should be ordered each time?
b. What is the total ordering cost for a year?
c. What is the total storage cost for a year?

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2- Find the economic order quantity and the reorder point, given
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Annual demand (D) = 1,000 units

Average daily demand ( ̅ ) = 1,000/365
Ordering cost (S) = $5 per order
Holding cost (H) = $1.25 per unit per year
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Lead time (L) = 5 days

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Cost per unit (C) = $12.50

Based on the economic order quantity and the reorder point, write down you inventory policy.
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What is the total annual cost under this policy?

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 Problem 3

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Wood County Hospital consumes 500 boxes of bandages per week. The

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price of bandages is $70 per box. The cost of processing an order is $60,

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and the cost of holding one box for a year is 15% of the value of the

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material. Assume 52 weeks per year.

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The hospital orders bandages in lot sizes of 900 boxes. What extra

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costs does the hospital incur, which it could save by applying the EOQ

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concept?

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Problem 3

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Wood County Hospital consumes 500 boxes of bandages per week. The price of
bandages is $70 per box. The hospital operates 52 weeks per year. The cost of

d
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processing an order is $60, and the cost of holding one box for a year is 15% of the
value of the material.

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a) The hospital orders bandages in lot sizes of 900 boxes. What extra costs does

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the hospital incur, which it could save by applying the EOQ concept?

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Annual demand rate D: 500 boxes/ week 52 weeks = 26000 boxes
Setup cost S: $60

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Unit cost C: $70
Percent carrying cost i: Annual unit holding cost H: $70 x 15% = $10.5 15%
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EOQ = 2DS = 2 × 26000 × 60 = 545
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H 10.5
D S  Q H  DC
Total annual cost TC:
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Q=900 boxes/order: 26000 ×$60 + 900 ×$10.5 + $70 × 26000 = $1,826, 458
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! $734
26000 ×$60 + 545 ×$10.5 + $70 × 26000 = $1,825, 724 Saving
EOQ=545 boxes/order:
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545 2
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 a
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