Calculate annual demand for the inventory item, Operation Management

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Ashish  keeps  his  inventory in special containers. Each  container occupies 10  sq fit of  store space. Only  5000 sq ft  of the storage space is available. The  annual demand for the inventory  item is 9000 containers priced at Rs. 8 per container. The  ordering cost is  estimated at Rs. 40 per order and the  annual  carrying  costs  amount to 25%  of the inventory  value.

 Would you  recommend to ashish to increase  his to rage space? If  so how much should  be the  increase?

Solution :

 Given D = 9000 units , A =  Rs. 40 / order , C - Rs. 8 / unit and h = 25% of Rs. 8 = Rs 2 unit / year

We have

      EOQ = √2AD / h

 

       =   √2X 9000 X 40 / 2 = 600

With  EOQ = 600 units  the  maximum  level of inventory  would  be  600 units and the space required to  hold it equals 600 X 10 = 6000 square feet.  The present capacity  being 5000  square  feet he should  increase the storage capacity  by 1000 square feet.


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