The Operations Manager for Shadyside Savings & Loan orders cash from her home office for her very popular "BIG BUCKS" automated teller machine,which only dispenses $100 bills.She estimates that this machine dispenses an average of 12,500 bills per month,and that holding a bill in inventory costs 10 percent of its value annually.She knows that each order for these bills costs $300 for clerical and armoured car delivery costs,and that order lead time is six days. Assuming a thirty-day month,and without allowing for safety stock,at what point should bills be reordered?
A)0 bills remaining
B)417 bills remaining
C)2,500 bills remaining
D)10,000 bills remaining
E)12,500 bills remaining

Question

Quizplus · Accepted Answer

To determine when to reorder, we need to calculate the economic order quantity (EOQ) which is the optimal order quantity that minimizes total inventory costs.

EOQ = √[(2DS)/H]

Where: 
D = Demand (number of bills dispensed per month) = 12,500
S = Ordering cost per order = $300
H = Holding cost per unit per year = 10% of $100 = $10

EOQ = √[(2 x 12,500 x $300)/$10] = 1,500 bills per order

Next, we calculate the reorder point which is the inventory level at which a new order should be placed.

Reorder point = D x Lead time + safety stock

Since safety stock is not given in the problem, we will assume there is none.

Lead time = 6 days
D = 12,500 bills per month = 12,500/30 = 417 bills per day

Reorder point = 417 x 6 = 2,502 bills

Therefore, bills should be reordered when there are 2,500 bills remaining (which is the closest option to our calculated reorder point).

The Operations Manager for Shadyside Savings & Loan Orders Cash