University Book Store buys women's polo T-shirts from a supplier, which is $16 per unit. The store sells 50,000 T-shirts per year. The annual carrying cost of T-shirts is 25% of its purchasing price, and the ordering cost is $40. If the book store operates for 250 days each year, and delivery of an order takes 2 working days. How low can the inventory get before the book store places an order? Group of answer choices 500 250 400 200

It is 400 units

Explanation:

Re-order level = Maximum usage x Maximum lead time

Maximum usage per day = 50,000/250

= 200 units per day

Maximum lead time (as given) = 2 days

Hence, Re-order level = 200 * 2

=400 units

When inventories reach this level, it is important that an order should be placed to replenish inventories. The reorder level is determined by consideration maximum usage per day and maximum lead time

Maximum lead time is the is the time between placing an order with a supplier, and the inventory becoming available.

Note

In case it is required to find order size that would minimize the total cost?

Answer

The order size that would minimize total cost is called Economic Order Quantity (EOQ)

EOQ = √ (2*Co*D) / Ch

Where Co = Ordering cost per order = $40

Ch = Holding cost per unit = 25%*$16=$4

D = Annual Demand = 50,000 units

EOQ = √ (2*40*50,000) / 4

= 1000 units