Item X is a standard item stocked in a companys inventory of

Item X is a standard item stocked in a company’s inventory of component parts. Each year
the fi rm, on a random basis, uses about 2,000 of item X, which costs $25 each. Storage
costs, which include insurance and cost of capital, amount to $5 per unit of average inventory.
Every time an order is placed for more of item X, it costs $10.
a. Whenever item X is ordered, what should the order size be?
b. What is the annual cost for ordering item X?
c. What is the annual cost for storing item X?

Solution

Answer :-

Annual demand usage (average), D = 2000
Cost of the item, C = $25
Storage/Inventory cost. I = $5
Ordering cost, S= $10

a ) Whenever item X is ordered, the order size should be 89.44

square root of (2*cost of order * demand / cost of carry)

b ) the annual cost for ordering item X = 224.72

c ) the annual cost for storing item X = 222.50