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Quantitative Methods: Inventory Model

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A product used in a laboratory of the hospital costs $60 to order, and its carrying cost per item per week is one cent. Demand for the item is six hundred units weekly. The lead time is three weeks and the purchase price is $0.60.

a. What is the economic order quantity for this item?
b. What is the length of the order cycle?
c. Calculate the total weekly costs.
d. What is the investment cost for this item?
e. If ordering costs increase by 50 percent, how would that affect EOQ?
f. What would be the reorder point for this item if no safety stock were kept?
g. What would be the reorder point if one thousand units were kept as safety stock?

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Solution Summary

A product used in a laboratory of the hospital costs $60 to order, and its carrying cost per item per week is one cent. Demand for the item is six hundred units weekly. The lead time is three weeks, and the purchase price is $0.60. The solution finds answers to following using an Inventory Model in Excel.

a. What is the economic order quantity for this item?
b. What is the length of the order cycle?
c. Calculate the total weekly costs.
d. What is the investment cost for this item?
e. If ordering costs increase by 50 percent, how would that affect EOQ?
f. What would be the reorder point for this item if no safety stock were kept?
g. What would be the reorder point if one thousand units were kept as safety stock?

Solution Preview

Dear Student,

Purposes of inventory Modelling,

1. Smooth-out inventory operations
2. Overcome stock shortages
3. Safeguard against Variations in market prices
4. Availability of quantity discounts to save costs

Inventory costs

1. Holding or carrying costs: storage, insurance, investment, pilferage, etc.
Annual holding cost = average inventory level x holding cost per unit per year
= order quantity/2 x holding cost per unit per year

2. Setup or ordering costs: cost involved in placing an order or setting up the ...

Solution provided by:
Champake Mendis, MEngSc, PhD
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  • MEngSc, University of Melbourne
  • Certificate IV in Training & Assessment , Australian Business Council
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