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Dears, could you please help on task below:
“Company forecasts that demand for Product KN5 will be 160 000 units in the coming year and it has traditionally ordered 10% of annual demand per order.The ordering costs is expexting to be 400$ per order while the holding costs is expected to be 5,12 $ per unit per year. A buffer Inventory of 5000 units ” of Product KN5 will be maintained, whether orders are made by the traditional method or using the economic order quantity model.
The answer
Average inventory = 5000+ 16 000/2 = 13 000
Holding cost of average inventory = 13 000 * 5,12 = 66 560 per yearQuestion
It is not clear why average cost was calculated as 16 000/ 2 ???
In my understanding it should be as 16 000 * 10/12Each order is for 10% x 160,000 = 16,000.
Therefore the inventory levels (ignoring the buffer inventory) will fluctuate between 16,000 and zero throughout the year. The average being 8,000.
I suggest that you watch my free lectures on this (and if needed the Paper MA lectures on inventory also, because this is revision from Paper MA).
The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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