The correct answer is: D. reorder point
The reorder point is the level of inventory at which a new order should be placed. It is calculated by multiplying the purchase order lead time by the number of units sold per unit of time. This ensures that there is always enough inventory on hand to meet demand while minimizing the costs of carrying inventory.
Carrying costs are the costs associated with holding inventory, such as storage costs, insurance costs, and obsolescence costs. Relevant total costs are the sum of carrying costs and ordering costs. Economic order quantity (EOQ) is the order quantity that minimizes the total costs of ordering and carrying inventory.
Here is a more detailed explanation of each option:
- Carrying costs are the costs associated with holding inventory, such as storage costs, insurance costs, and obsolescence costs. Carrying costs are typically expressed as a percentage of the inventory value. For example, if the carrying cost is 10%, then the cost of holding \$100 worth of inventory for one year would be \$10.
- Relevant total costs are the sum of carrying costs and ordering costs. Ordering costs are the costs associated with placing an order, such as the cost of the purchase order itself, the cost of shipping the goods, and the cost of receiving the goods. Ordering costs are typically expressed as a fixed cost per order. For example, if the ordering cost is \$10 per order, then the cost of placing an order for 100 units would be \$100.
- Economic order quantity (EOQ) is the order quantity that minimizes the total costs of ordering and carrying inventory. The EOQ can be calculated using the following formula:
$$EOQ = \sqrt{\frac{2DC}{\lambda}}$$
where:
- $D$ is the annual demand for the product
- $C$ is the cost of placing an order
-
$\lambda$ is the annual holding cost per unit of inventory
-
Reorder point is the level of inventory at which a new order should be placed. It is calculated by multiplying the purchase order lead time by the number of units sold per unit of time. This ensures that there is always enough inventory on hand to meet demand while minimizing the costs of carrying inventory.