A & B Retail Enterprise has an annual average requirement of 50,000 units of its product. It has been estimated that the ordering cost is P80 per order, and that the carrying cost per unit of inventory is P2. It has 200 working days in a year and maintains a safety stock of 3,000 units. It observes a lead time of 10 days.
Requirement: Illustrate the corresponding formula/equation and your solution.
1. Economic order quantity (5 pts.)
2. Total carrying cost (5 pts.)
3. Total ordering cost (5 pts.)
Answer (1)
To address the question regarding the inventory management of A & B Retail Enterprise, we need to consider three key calculations in inventory control: the Economic Order Quantity (EOQ), Total Carrying Cost, and Total Ordering Cost. Let's go through a step-by-step explanation of each:
Economic Order Quantity (EOQ):
The EOQ is the order quantity that minimizes the total inventory costs, which include ordering and carrying costs. The formula to calculate EOQ is given by:
EOQ = H 2 D S
Where:
D is the annual demand (50,000 units).
S is the ordering cost per order (P80).
H is the carrying cost per unit per year (P2).
Plug in the values: EOQ = 2 2 × 50000 × 80 = 2 8000000 = 4000000 = 2000
Therefore, the EOQ is 2,000 units.
Total Carrying Cost:
Total carrying cost is the cost of holding inventory over some period. The formula is:
Total Carrying Cost = 2 EOQ × H
Substitute the known values: Total Carrying Cost = 2 2000 × 2 = 1000 × 2 = 2000
The total carrying cost is P2,000.
Total Ordering Cost:
This is the cost incurred by placing orders over a particular time frame. The calculation is:
Total Ordering Cost = EOQ D × S
Use the values: Total Ordering Cost = 2000 50000 × 80 = 25 × 80 = 2000
The total ordering cost is P2,000.
To summarize:
The Economic Order Quantity (EOQ) is 2,000 units.
The Total Carrying Cost amounts to P2,000.
The Total Ordering Cost is P2,000.
These calculations demonstrate how A & B Retail Enterprise can effectively manage their inventory to optimize costs.
