Question

Ergonomics, Inc. sells ergonomically designed office chairs. The company provided the following information:

Average Demand = 15 units per day

Average lead time = 20 days

Item unit cost = $60 for orders of less than 200 units

Item unit cost = $58 for orders of more 200 units or more

Ordering costs = $20

Inventory carrying costs = 21%

The business year is 250 days

Based on the above information:

1. How many chairs should the firm order each time?
2. What will the firm’s average inventory be under each alternative?
3. What will be the breakdown of cost for each alternative?

Assume there is no uncertainty at all about demand or the lead time.

Answer 1

Economic Order Quantity refers to the number of unit the company should add to the inventory and the order is made to minimize the total inventory cost. It maintain a balance between ordering costs and carrying costs. Reorder point is the level of inventory which the firm holds in stock and when the inventory level reach this point, the firm must reorder the item.

EOQ act as a review inventory system to monitor the inventory level continuously and once the level reaches the reorder point, a fixed quantity of order is placed. Thus EOQ helps in calculating reorder point and optimal reorder quantity to avoid shortage of inventory.