Thus carrying cost can be expressed as follows

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Unformatted text preview: e firm’s average inventory. The average inventory is the order quantity divided by 2 (Q/2), because inventory is assumed to be depleted at a constant rate. Thus carrying cost can be expressed as follows: Carrying cost total cost of inventory The sum of order costs and carrying costs of inventory. Hint The EOQ calculation helps management minimize the total cost of inventory. Lowering order costs will cause an increase in carrying costs and may increase total cost. Likewise, a decrease in total cost may result from reduced carrying costs. The goal, facilitated by using the EOQ calculation, is to lower total cost. reorder point The point at which to reorder inventory, expressed as days of lead time daily usage. C Q/2 (14.5) The firm’s total cost of inventory is found by summing the order cost and the carrying cost. Thus the total cost function is Total cost (O S/Q) (C Q/2) (14.6) Because the EOQ is defined as the order quantity that minimizes the total cost function, we must solve the total cost function for the...
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