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Vargas Enterprises wishes to determine the economic order quantity (EOQ) for a critical and expensive inventory item that it uses in large amounts at a relatively constant rate throughout the year. The firm uses 450,000 units of the item annually, has order costs of $375 per order, and its carrying costs associated with this item are $28 per unit per year.
The firm plans to hold safety stock of the item equal to 5 days of usage, and it estimates that it takes 12 days to receive an order of the item once placed. Assume a 365-day year.
a. Calculate the firm's EOQ for the item of inventory described above.
b. What is the firm's total cost based upon the EOQ calculated in part (a)?
c. How many units of safety stock should Vargas hold?
d. What is the firm's reorder point for the item of inventory being evaluated? (Hint: Be sure to include the safety stock.)
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