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Unformatted text preview: Thus, as soon as the item’s inventory level falls
to the reorder point (45 units, in this case) an order will be placed at the item’s
EOQ. If the estimates of lead time and usage are correct, then the order will
arrive exactly as the inventory level reaches zero. However, lead times and usage
rates are not precise, so most firms hold safety stock (extra inventory) to prevent
stockouts of important items.
MAX Company has an A group inventory item that is vital to the production
process. This item costs $1,500, and MAX uses 1,100 units of the item per year.
MAX wants to determine its optimal order strategy for the item. To calculate the
EOQ, we need the following inputs:
Order cost per order
Carrying cost per unit per year $150
$200 Substituting into Equation 14.7, we get
EOQ 2 1,100 $150
$200 41 units The reorder point for MAX depends on the number of days MAX operates
per year. Assuming that MAX operates 250 days per year and uses 1,100 units of
this item, its daily usage is 4.4 units (1,100 2...
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