--%>

Order Quantity-Cycle Inventory-Safety Inventory

Consider the following data pertaining to a distribution center.

2446_distribution centre.jpg

Ordering cost: $50 /order
Holding cost: $4 /unit /week.
Cycle service level: 97%

Summary:

The question is related to cost accounting in finance. It deals with measures such as Order Quantity, Cycle Inventory, Safety Inventory, Reorder Level, Annual Inventory Holding, Annual Ordering Cost, etc. All these measures are calculated according to given cost and time.

E

Expert

Verified

Consider the following data pertaining to a distribution center.

Mean Weekly Demand(d): 100
Standard Deviation  of Weekly Demand(Sd): 30
Lead Time(L): 2 Weeks
No. of weeks in year: 50


Ordering cost (Cp): $50 /order
Holding cost (Ch): $4 /unit /week.
Cycle service level: 97%  
Z – value for service level 97 % = 1.89
Annual demand (D) = d * No. of weeks = 100 * 50 = 5000 units
Standard deviation of weekly demand during lead time =SL = sqrt( sum of squares of ‘Sd’ during the ‘L’ number of weeks) = sqrt( 302 + 302) = 42.42 units

Order Quantity = Q = sqrt( (2 * D * Cp)/Ch) 
              = sqrt((2* 5000 * 50)/4)
              = 353.55 units
              =354 units approx

Cycle inventory = Q/2 
    = 353.55/2 
    = 176.775 units
    = 177 units approx

Safety inventory = z* SL 
     = 1.89 * 42.42 
    = 80.18 units
    = 80 units approx

Re-Order Level = d*L + z* SL
     = 100*2 + 1.89*42.42
    = 280 units approx

Annual Inv Holding Cost = (Q/2)*Ch
      = 353.55/2 * 4
      = $ 707 approx

number of orders per year
= D/Q
= 5000/353.55
=14.14

Annual ordering cost = (D/Q) * Cp
              = 5000/353.55 * 50
              =$ 707 approx

   Related Questions in Finance Basics

  • Q : Describe risk aversion Describe risk

    Describe risk aversion? Risk aversion is the tendency to ignore additional risk. Risk-averse people will ignore risk if they can, unless they attain additional compensation for letting that risk. In finance, the added compensation is a higher ex

  • Q : Explain non diversifiable risk and how

    Explain non diversifiable risk? How is it measured? Unless the returns of one-half the assets into a portfolio are entirely negatively correlated along with the other half-that is extremely unlikely-some risk will

  • Q : Seasonal variations and secular trends

    Normal 0 false false

  • Q : Consumers advocates expressed concern

    Consumer's advocates expressed concern over such merger possibilities. Elucidate this statement.

  • Q : State Section 1.80 Section 1.80 : The

    Section 1.80: The section of Budget Act which comprises the periods of accessibility for Budget Act appropriations.

  • Q : Explain the investment opportunity

    Explain the investment opportunity schedule (IOS)? How does it help financial managers take business decisions? The investment opportunity schedule illustrates graphically proposed capital budgeting projects depicting the IRR and dollar amount

  • Q : Disadvantages of the Finger print

    Disadvantages of the Finger print technique: Health concerns while touching the sensor which is being touched by many number of individuals. Sometimes due to age and occupation may cause some diff

  • Q : Three examples of mutually exclusive

    Provide three examples of mutually exclusive projects. Mutually exclusive projects are projects which compete against each other for our selection. If firm were considering the purchase of new computer, requiring only one computer, then the pro

  • Q : Describe depreciation expense Describe

    Describe depreciation expense as it seems on the income statement.  Accounting depreciation is the allocation of asset's primary cost over time. Depreciation cost on an income statement is the amount of the asset=s initial cost allocated to

  • Q : Risk from perspective of the Capital

    Discuss risk through the perspective of the Capital Asset Pricing Model (CAPM).The Capital Asset Pricing Model, or CAPM, can be utilized to compute the appropriate required rate of return for an investment project specified its degree of risk as