Novelty Gifts, Inc. is expecting some inventory control problems. The manager, currently orders 5,000 units four times each year to handle annual demand of 20,000 units. Each order costs $15 and each unit cost $1.50 to carry. The manager maintains a safety stock of 200 units.


Questions:

A. What is Novelty's current total annual inventory cost?

B. Calculate the economic ordering quantity.

C. What is the average inventory under EOQ if the manager maintains a safety stock of 200 units?

D. Calculate the total annual inventory cost under EOQ.

Total annual cost = annual ordering cost + annual carrying cost
Annual ordering cost = number of orders * cost of ordering
Annual carrying cost = average inventory * cost of holding
Number of orders = annual demand / order quantity

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