Inventory and Order Quantity

The next task is to provide the optimum number of shoelaces to order, using appropriate cost balancing. The economic order quantity (EOQ) is the order amount that allows for an optimum level of materials at the lowest cost possible. There is a demand ofr 300,000 shoelaces per year. The setup cost is $125 per order. There is a $.10 holding cost per unit. The optimal order quantity recommended is 27,386.13 shoelaces per order, with a maximum inventory of 27,386.13. This means that we will order just the amount of shoelaces needed to fulfill current production orders. The average inventory is 13,693.06 shoelaces. There will be approximately 10.95 orders per year. The annual setup cost is $1,369.31, and the annual holding cost is $1,369.31. This makes the total cost per year $2, 738.61. This decision tool allows us to calculate the correct amount needed per order to ensure that we are lowering operating and holding costs, while keeping production properly stocked.

Dong Hai Supply Annual Inventory Carrying Cost = 0.322 * ((24,037*80.11) + (24,037/551)*182) = $622,601.

Raising maximum distributor order, more than customer demand is one good choice made in the three games. According to the supply chain order, the maximum distributor order totals to 15units compared to a maximum demand of 9units. These figures prove that backordering costs will not occur during business operations. Good inventory management techniques require placing adequate orders to reduce backordering costs. The cost and time of backordering affects operations and hence the need to adequate inventory to match demand changes. An average customer order of 7units compared to average distributor order of 5units points to low backordering costs. A minimum customer order of 4units means that market demand is under control from

330-10-30330-10-30-1 The primary basis of accounting for inventories is cost, which has been defined generally as the price paid or consideration given to acquire an asset. As applied to inventories, cost means in principle the sum of the applicable expenditures and charges directly or indirectly incurred in bringing an article to its existing condition and location. It is understood to mean acquisition and production cost, and its determination involves many considerations. 330-10-30330-10-30-2 Although principles for the determination of inventory costs may be easily stated, their application, particularly to such inventory items as work in process and finished goods, is difficult because of the variety of considerations in the allocation of costs and charges.

The economic order quantity is used for this situation because it shows the number of pairs of laces that can be added to the inventory each time an order is placed to minimize the holding and ordering costs. It provides the information that can be used to control the inventory levels and costs.

EOQ is used to find the optimal order quantity so that the annual inventory cost is

We prefer the EOQ/ ROP system as gains from reducing the order/ production size (gains in terms of less value of inventory being produced) which though lead to increase in setup cost far outweigh the gains from Blanchard’s current system (gains in terms of reduction of setup cost) while, costs are that of the value of inventory being produced.

This chapter sets forth the general principles applicable to the pricing of inventories of mercantile and manufacturing enterprises. The standard gives a major

Inventory, 1/1/X6 |24,000 units | |Units manufactured |80,000 | |Units sold |82,000 | |Inventory, 12/31/X6 |22,000 units | |Manufacturing costs: | |Direct materials |$3 per unit | |Direct labor |$5 per unit | |Variable factory overhead |$9 per unit | |Fixed factory overhead |$280,000 | |Selling & administrative expenses: | |Variable |$2 per unit | |Fixed |$136,000 | |

2. The present value of the holding cost of inventory for the duration ofinitial replenishment cycle is

EOQ as described everywhere is “the order quantity that minimizes total inventory holding costs and ordering costs. It is one of the oldest classical production scheduling models”. This model uses the following assumptions:

Aver. level of inventory = (200 u / 2) + [(800 u x 10) /365]

Lately, Mr. Milligan has become concerned with his inventory management methods. he now wants to better manage his inventory. As a starting point, he wants to examine his costs, sales, markup percentages, gross profits, and inventory levels. He asks you to review his inventory and make suggestions for improvement. He provides you with the data and asks you to prepare an Inventory Analysis worksheet.

Tasks:  What should Alison do? o Develop plans to improve the inventory management o Develop time-based supply strategies to bring competitive advantages to the organization  Identify the functions and forms of inventory  What are alternatives for inventory management? o ABC classification o Supplier-managed inventories (SMI) o Just-on-time or Just-in-time (JIT) o Enhance the forecasting system (factor correlated with inventory variation)  Provide training programs for current and new hiring employees 1

including the use of Excel function NORMSINV. What is the total annual inventory cost of