Warren Enterprises expects 20,000 unit sales, has ordering costs of $20 per order, carrying costs of $1.00 per unit, and desires to keep 100 units in safety stock. Assuming level production, what should be their average inventory?
A)200-300
B)301-400
C)401-500
D)501-600

Question

Quizplus · Accepted Answer

First, let's calculate the Economic Order Quantity (EOQ) using the formula:
EOQ = sqrt((2DS)/H)
where 
D = demand = 20,000 units/year
S = ordering cost = $20/order
H = carrying cost = $1/unit/year

EOQ = sqrt((2*20,000*20)/1) = 400 units/order

Since we want to maintain a safety stock of 100 units, the average inventory would be:

Average Inventory = EOQ/2 + SS
where SS = safety stock = 100 units

Average Inventory = 400/2 + 100 = 300 units

Therefore, the best choice is D, which includes a range of 501-600.

Warren Enterprises Expects 20,000 Unit Sales, Has Ordering Costs of $20