Economic ordering quantity, reorder point, and safety stock Chen Enterprises wishes to determine the economic...
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Accounting
Economic ordering quantity, reorder point, and safety stock
Chen Enterprises wishes to determine the economic order quantity for a critical and expensive inventory item that it uses in large amounts at a relatively constant rate throughout the year. The firm uses 450,000 units of the item annually and has order costs of $375 per order; its carrying costs associated with this item are $28 per unit per year. The firm plans to hold safety stock of the item equal to five days of usage, and it estimates that 12 days are needed to receive an order for the item once placed. Assume a 365-day year.
(a)Calculate the firms EOQ for the item of inventory described.
(b)What is the firms total cost based upon the EOQ calculated in part (a)?
(c)How many units of safety stock should Chen hold?
(d)What is the firms reorder point for the item of inventory being evaluated?
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