Question

A company has a steady demand of a product of 40 items per month. the purchase cost is rs. 6 per item and cost of ordering and procuring the material is rs. 15 per occasion. if stock holding cost is 20% per annum, how frequency should the company replenish the stock

Answer 1

Given Monthly Demand = 40

Then annual Demand = 40 × 12months = 480

Carrying cost is 20%..then amount will be. annual Demand ×purchase price ×20% = 480×6×20%= 576..
carrying cost Per unit =
576/480= 1.2

ordering cost = 15

We know that economic reorder quantity= Root over (2×demand×ordering cost)/carrying cost

=Root over(2 × 480 ×15)/1.2

=110.

frequency of reordering will be 480/110= 4.36