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Inventory Management^261

a. What is the annual before-tax cost of the current inventory policy?

b. What is the optimal reorder quantity according to the EOQ model?

c. If the company changes its reorder policy to conform with the EOQ model,

what will be the net savings? (Round the number of reorders to the nearest

integer.)

Solution

a. The annual before-tax cost of the current policy are :

Annual cost = Ordering cost + Carrying cost

= (12)(Rs 375) + (30,000)(1.20)/2

= Rs 4,500 + Rs 18,000 = Rs 22,500

b. The optimal reorder quantity according to the EOQ model is:

Q* =^15 ,^000

1. 20

2 ( 375 )( 360 , 000 )

=



 





c. To conform with the EOQ model, the company will place 24 orders per year
[=(360,000)/15,000)]. The average level of inventory will be 7,500 [=15,000/2]
Thus the annual inventory costs will be:
Annual cost = Ordering cost + Carrying cost
= (24)(Rs 375) + (7,500)(1.20)
= Rs 9,000 + Rs 9,000 = Rs 18,000
The annual before-tax saving of following the EOQ model is Rs 4,500 [=Rs 22,500

• 18,000].