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Inventory Management Calculations

The document provides solutions to inventory management problems for Ardmore Farm and Seed and Lott Manufacturing, Inc., detailing calculations for Economic Order Quantity (EOQ), average inventory balance, and reorder points. For Ardmore, the EOQ is 4,000 gallons with a total annual inventory cost of $1,450, while Lott's EOQ is approximately 2,581.99 units with savings of $8,254 compared to ordering 10,000 units. The document includes specific calculations and assumptions for each case.

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5 views12 pages

Inventory Management Calculations

The document provides solutions to inventory management problems for Ardmore Farm and Seed and Lott Manufacturing, Inc., detailing calculations for Economic Order Quantity (EOQ), average inventory balance, and reorder points. For Ardmore, the EOQ is 4,000 gallons with a total annual inventory cost of $1,450, while Lott's EOQ is approximately 2,581.99 units with savings of $8,254 compared to ordering 10,000 units. The document includes specific calculations and assumptions for each case.

Uploaded by

mostaq.nyttc.edu
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Solutions to Problems: Chapter 4 Inventory Management

1. Ardmore Farm and Seed - EOQ, average inventory balance, and reorder point.
ASSUMPTIONS
Order costs (F) $25.00
Holding costs per gal. (H) $0.25
Total annual quantity (T) 80,000
Order Quantity (Q) 10,000
Planning Period 365
Delivery Time (days) 7

a.) Calculating annual inventory costs.


Total cost = (F * T/Q) + (H * Q / 2) = (25 * 80,000 / 10,000) + (0.25 * 10,000 / 2)
Total Cost = $1,450

b.) Calculating the EOQ.


EOQ = SQRT(2 * F * T / H) = (2 * 25 * 80,000 / 0.25)0.5
EOQ = 4,000 Gallons

c.) Calculating the number of orders and the average inventory balance.
Optimal Number of Orders = T / EOQ = 80,000 / 4000
Optimal Number of Orders = 20

Average Inventory Balance = EOQ / 2 = 4000 / 2


Average Inventory Balance = 2000 Gallons

d.) Calculating the reorder point.


Daily Usage Rate = T / # of Days in Planning Period = 80,000 / 365
Daily Usage Rate = 219.18 Gallons per day

Reorder Point = Daily Usage Rate * Delivery Time = 219.18 * 7


Reorder Point = 1,534.25 Gallons

2. Lott Manufacturing, Inc. - EOQ, average inventory balance, and reorder point

ASSUMPTIONS
Order costs (F) $50.00
Holding costs per unit (H) $3.00
Total period quantity (T) 200,000
Order Quantity (Q) 10,000
Planning Period 250
Delivery Time (days) 2
a.) Calculating the EOQ.
EOQ = SQRT(2 * F * T / H) = (2 * 50 * 200,000 / 3.00)0.5
EOQ = 2,581.99 Units

b.) Calculating the EOQ savings.


Total cost = (F * T/Q) + (H * Q / 2) = (50 * 200,000 / 10,000) + (3.00 * 10,000/2)
Total Cost @10,000 units = $16,000

Total Cost EOQ = (F * T / Q) + (H * Q / 2) where Q = 2,581.99 units


= (50 * 200,000 / 2,581.99) + (3.00 * 2,581.99 / 2) = $7,746

Savings with EOQ = $8,254 = $16,000 - $7,746 per planning period

c.) Calculating the optimal number of orders and average inventory balance.
Optimal Number of Orders = T / EOQ = 200,000 / 2,581.99 =
Optimal Number of Orders = 77

Average Inventory Balance = EOQ / 2 = 2,581.99 / 2


Average Inventory Balance = 1,290.99 Units

d.) Calculating the reorder point.


Daily Usage Rate = T / # of Days in Planning Period = 200,000 / 250
Daily Usage Rate = 800 Units per day

Reorder Point = Daily Usage Rate * Delivery Time = 800 * 2


Reorder Point = 1,600 Units

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