A firm wishes to control inventory costs. The accounting department has provided the following information; monthly demand is 2,000 units; the cost per order is $100; the cost per unit is $5; and the carrying cost is 30%.
(1) What is the total purchase cost?
(2) Find out the optimal order quantity.
(3) Find out the total cost for the optimal order quantity. Compare the total carrying cost to the total ordering cost.
(4) Suppose management wants to set the order level to a round figure of 2,000. Calculate the total cost of such a policy, and compare the result with the answer to question (2). What decision will you recommend? Compare the total carrying cost to the total ordering cost.
(5) suppose management wants to maintain a buffer or safety inventory stock of 200 units all through during the whole year. How much is the additional cost to question (3), and to question (4)?
(6) suppose it takes 3 days between placing an order and receiving it, at what inventory level should an order be triggered (or placed) (use 360 days per year)?