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Dr. Mohamed A. Hamada Lecturer of Accounting Information Systems 1-1 PRACTICAL CASES ON CH 6 Inventory Management

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2 FORMULA: EOQ EOQ is a calculation intended to lower total inventory costs. EOQ equation 2: = √ 2 x Order costs ÷ Unit Carrying cost = √ 2PD/C = √ 2 x $25 x 10,000 / $2 = √ 250,000 = 500

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3 FORMULA: EOQ Cost EOQ Total cost calculates TC using the EOQ batch size in units to cut total cost by $250. Total cost (TC) equation 1: = Ordering cost + Carrying cost = PD/Q + CQ/2 PD/Q = [(10,000/500) x $25] = $ 500 CQ/2 = [(500/2) x $2] = $ 500 TC = $1,000

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4 FORMULA: Reorder Point (ROP) ROP identifies the proper time to place an order to avoid stockout. Reorder Point (ROP) equation 3: = Rate of usage x Lead time = 50 parts per day x 4 days = 200 parts

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5 FORMULA: Safety Stock Safety stock provides a buffer to reorder point. Safety stock: = Lead time x (maximum – average usage) = 4 days x (60 – 50) = 40 parts

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6 FORMULA: ROP + Safety Stock Safety stock adds a buffer to reorder point. Reorder Point (ROP) equation 4: = Rate of usage x Lead time + Safety stock = 50 parts per day x 4 days + 40 = 240 parts

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Example 7 Alex Company is a wholesaler. Alex purchases 800,000 units of product X each year for sale to retailers. The cost of placing an order is $40. The cost of holding one unit of inventory for one year is $4. Required 1. Compute the economic order quantity. 2. How many orders would Alex place under the EOQ policy? 3. Compute the annual ordering cost for the EOQ. 4. Compute the annual carrying cost for the EOQ. 5. Compute the total inventory-related cost at the EOQ.

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Solution 8

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