Consider a Basic Economic Order Quantity (EOQ) Model with the Following

question 5

Essay

Consider a basic economic order quantity (EOQ) model with the following characteristics:
$\begin{array}{ll}\text { Item cost: } & \$ 15 . \\\text { Item selling price: } & \$ 20 .\\\text { Monthly demand: } &500 \text { units (constant) }\\\text { Annual holding cost: } & 9 \% \text { of purchase cost }\\\text { Cost per order: }& \$ 18\\\text { Order lead time: } & 5 \text { days } \\\text { Firm's work year: } & 300 \text { days ( } 50 \text { weeks } @ 6 \text { days per week) } \\\text { Safety stock: } & 15 \% \text { of monthly demand }\end{array}$

For this problem, determine the values of:
A.Q* the optimal order quantity.
B.R, the reorder point.
C.T, the cycle time.
D.M, the maximum quantity in inventory.
E.Total annual inventory cost.
F.Suppose the vendor demands purchases in multiples of 500 only.
What is the increase in total annual inventory cost that this causes?

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Definitions:

Market Price

The current price at which an asset or service can be bought or sold in the marketplace.

Days' Sales Uncollected

A financial ratio indicating the average number of days it takes for a company to collect revenue after a sale has been made.

Accounts Receivable

Money owed to a company by its customers from sales or services on credit that is expected to be paid within a short duration, usually one year.

Inventory Turnover Ratio

A financial metric that measures how many times a company has sold and replaced its inventory over a specific period.