Economic order quantity

1. Vigil Company uses 32,000 units each year during the 240 days the company operates. The cost to hold one unit in inventory is $0.50 and the ordering cost is $20.

What is the economic order quantity?

2. Ward, Inc., needs 180,000 units each year to meet its production requirements. The costs incurred to place an order are $10 and the cost of carrying a unit in inventory is $2.

What is the economic order quantity?

Fortura Company is considering adopting a JIT system. Fortura estimates that facility-sustaining and product-sustaining inventory costs will decrease by $300,000 if JIT is adopted. However, Fortura anticipates a $240,000 increase in prevention and appraisal quality costs to reduce external failure costs by $50,000. Finally, Fortura estimates that a one-time cost of $100,000 will be required to install a kanban system.

Should Fortura adopt JIT? Why?

Nelson operates 300 days per year. In the past, demand for its product has been fairly steady at 50 units per day. Recently however, customer orders have been inconsistent, ranging from 25 to 150 units per day. It costs Nelson $0.50 per day to store one unit in inventory while its facility-sustaining warehousing costs are $50,000 per year.

Should Nelson adopt a just-in-time inventory system? Why?

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