Iverson Industries uses 80,000 units of an A item of raw material inventory each year. The firm

Question:

Iverson Industries uses 80,000 units of an “A” item of raw material inventory each year. The firm maintains level production throughout the year, given the steady demand for its finished products. The raw material order cost is $225 per order and carrying costs are estimated to be $10.50 per unit per year. The firm wants to maintain a safety stock of 10 days of inventory, and it takes 5 days for the firm to receive an order once it is placed. Assume a 365-day year.

a. Calculate the economic order quantity (EOQ) for Iverson’s raw material.

b. How large a safety stock (in units) of inventory should the firm maintain?

c. What is Iverson’s reorder point for this item of inventory?

Economic Order Quantity
Economic order quantity (EOQ) is the ideal order quantity a company should purchase to minimize inventory costs such as holding costs, shortage costs, and order costs. This production-scheduling model was developed in 1913 by Ford W. Harris and has...