Question 2

XYZ Ltd is expecting annual demand for its product this year to be 4,000 units at a cost of $500 and price of $1,900 each. The company requires a 9% annual rate of return on investment. The relevant incremental costs of inventory per year are $90 per unit for insurance, handling, and storage. The relevant ordering cost per purchase order is $200. The purchase lead time is 20 days. Assume 365 days per year.

Required:

a)Calculate the carrying cost per year per unit of inventory

b)Calculate the economic order quantity

c)Calculate the number of orders to be placed each year

d)Calculate the total relevant ordering costs [= (demand / EOQ) x ordering cost]

e)Calculate the total relevant carrying costs [= (EOQ / 2) x carrying cost]

[= total relevant ordering costs + total relevant carrying costs]

f)Calculate relevant total costs

g)Calculate the reorder point