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PQR has a demand of 7500 units per month. Each unit costs $5, ordering cost is $100 per order and the Holding cost is 10% of the purchase price per year. There is a lead time of 30 days between placing the order and receiving delivery. If they order Economic Order Quantity each time, at what level of inventory should a new order be placed ( to the nearest unit).
re -order level should be enough to sustain the business through the 30 days waiting time (lead time).
30 days = one month.
and we need 7,500 units per month. so answer is 7,500 units
I actually got the question from one of the OT F9 mock exams, and the answer was 7397 units. how they arrived at the answer is what I don’t know. I will appreciate if anyone can work it out, pls
Patrick: 30 days does not equal one month. Some months have 31 days 🙂
Olaniyl: Patrick was almost correct. There are 365 days in a year, and so to have enough to last 30 days they need to order when they have 30/365 x (12 x 7500) = 7397
(and before anyone says that some years have 366 days, in the exam you always assume 365 unless told different 🙂 🙂 )
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