Peterson Enterprises Uses a Fixed-Order Quantity Inventory Control System

question 36

Essay

Peterson Enterprises uses a fixed-order quantity inventory control system. The firm operates 50 weeks per year and has the following characteristics for an item:
Demand = 50,000 units/year
Ordering cost = $35/order
Holding cost = $2/unit/year
Lead time = 3 weeks
Standard deviation in weekly demand = 125 units
a.What is the economic order quantity (EOQ) for this item?
b.If Peterson wishes to provide a 90 percent cycle service level, what is the reorder point with safety stock?

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Definitions:

Total Costs

The sum of all expenses incurred in the production of goods or services, including both fixed and variable costs.

Net Present Value

A method used in capital budgeting to evaluate and compare the profitability of investments, which calculates the difference between the present value of cash inflows and outflows.

Concentration Accounts

A single account used by companies to aggregate funds from different accounts, simplifying cash management.

Lockboxes

A banking service where payments are sent to a special post office box rather than to the company's offices, to speed up transaction processing.