Exercise: Cospo Group is a computer assembling company.

To prepare
for the assembly, the company needs to order radiators, and often buy
for $12 per radiator set, ordering 1300 units/order. The annual demand
is 5200 sets of radiators. The annual ratio of inventory costs is 3 dollars
for each radiator; The estimated order cost is $50.
Calculate the following contents:
(a) The average inventory level, assuming every day, the company
consumes the same amount of radiator
(b) Number of orders per year
(c) Total cost of keeping inventory annually
(d) Total annual ordering cost
(e) Total annual inventory cost

Solve:
Unit price c $12

Units/order Q 1300

n of orders n 4

Annual demand D 5200

Inventory cost 𝑐ℎ $3/unit

Estimated order cost OC $50

a) The average inventory level, assuming every day, the company

consumes the same amount of radiator:
𝑚𝑎𝑥 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑙𝑒𝑣𝑒𝑙 (𝑂𝑟𝑑𝑒𝑟 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑄) + 𝑚𝑖𝑛 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑙𝑒𝑣𝑒𝑙
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑙𝑒𝑣𝑒𝑙 = 2
1300 + 0
= 2
= 650 (𝑢𝑛𝑖𝑡𝑠)
b) Number of orders per year
𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑 5200
𝑛 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 = 𝑢𝑛𝑖𝑡𝑠/𝑜𝑟𝑑𝑒𝑟
= 1300
= 4 (𝑡𝑖𝑚𝑒𝑠)
c) Total cost of keeping inventory annually
𝑄 1300
𝐴𝐻𝐶 = 2
×𝑐×𝑘= 2
× 3 = 1950 ($)
d) Total annual ordering cost
𝐴𝑂𝐶 = 𝑐0 × 𝑛 = 50 × 4 = 200 ($)
e) Total annual inventory cost
𝐴𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑐𝑜𝑠𝑡 = 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 + 𝑂𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 + 𝐻𝑜𝑙𝑑𝑖𝑛𝑔 𝑐𝑜𝑠𝑡
= 𝑐 × 𝑄 × 𝑛 + 𝐴𝑂𝐶 + 𝐴𝐻𝐶 = 62400 + 200 + 1950 = 64550 ($)