A unit of inventory costs a company $40. Annual carrying costsare 1% for interest charges, 1% for insurance, 2% allowance forobsolescence, $2 per unit for building overheads, $1.50 per unitfor damage and loss, and $4 per unit for miscellaneous costs.Annual demand for the item is constant at 1000 units and each ordercosts $100 to place.
- Calculate the economic order quantity and the total costsassociated with stocking the item
- If the supplier of the item will only deliver batches of 250units, how are the inventory carrying costs affected?
- If the supplier relaxes his order size requirement, but thecompany has limited warehouse space and can stock a maximum of 100units at any time, what would be the optimal ordering policy andassociated costs?
Use the $40 price to convert dollar cost to percentages.Remember to think carefully about which costs should and should notbe included in the calculation of inventory carrying costpercentage. You have to do this calculation before you cancalculate EOQ. The rule is only include those costs which varydirectly with inventory levels.
Use Excel to show all the answer.
