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