Question

Diagnostic Supplies has expected sales of 84,100 units per year, carrying costs of \(5 per unit, and an ordering cost of \)10 per order.

c. Assume an additional 80 units of inventory will be required as safety stock. What will the new average inventory be? What will the new total carrying cost be?

Short answer

The average inventory will be 370 units and the carrying cost will be $1,850.

Step-by-step solution

Calculation of average inventory

The average inventory will be 370 units.

$\begin{array}{rcl}\mathrm{Average}\mathrm{inventory}& =& \frac{\mathrm{EOQ}}{2}+\mathrm{Safety}\mathrm{stock}\\ & =& \frac{580}{2}+80\\ & =& 370\mathrm{units}\end{array}$

Carrying cost of inventory

The total carrying cost is $1,850.

$\begin{array}{rcl}\mathrm{Carrying}\mathrm{cost}& =& \mathrm{Carrying}\mathrm{cost}\mathrm{per}\mathrm{unit}\times \mathrm{Average}\mathrm{inventory}\\ & =& \$5\times 370\mathrm{units}\\ & =& \$1,850\end{array}$