Inventory Management: EOQ, Profit Margin, and Asset Turnover

This assignment solution provides a detailed analysis of inventory management using the Economic Order Quantity (EOQ) model and key financial metrics. It begins by calculating the EOQ based on given annual demand, ordering cost, and carrying cost. The impact of increased lead time on reorder point and order quantity is assessed, along with its potential negative effects on sales and manufacturing. The solution further explores how changes in average demand and ordering costs influence the EOQ. The second part of the assignment involves calculating gross margin, total expenses, current assets, total assets, profit, profit margin, asset turnover, and return on assets using provided financial data. The strategic profit model is applied to determine the company's profit margin and assess the effectiveness of asset utilization in generating sales. The analysis concludes that the company has a good profit margin and efficiently uses its assets.

Inventory Management

TABLE OF CONTENTS
QUESTION B1................................................................................................................................3
QUESTION B2................................................................................................................................4
REFERENCES................................................................................................................................6

QUESTION B1
A
EOQ= √2 D O / C
=√2 * 40000 * 200 / 4
= √16000000 / 4
= √4000000
= 2000 units
Buying price/ ordering cost= 200
Annual demand= 40000
Carrying cost = 8 % that is 50 * 8 % = 4
B
Average lead time increased from 10 to 12 days and now the reorder quantity and reorder point
will change.
Minimum stock required to be maintained =
(40000 / 365) * 12 = 1315 units
This implies that the minimum stock is less that EOQ due to increasing the lead time and this
does not have any impact over the EOQ.
Order quantity formula = EOQ= √2 D O / C
=√2 * 40000 * 200 / 4
= √16000000 / 4
= √4000000
= 2000 units
Reorder point = 2000 * 12 = 24000
C
The impact of longer average lead time is that this will affect the sales and manufacturing
process in negative manner. This is pertaining to the fact when the lead time will increase then
there will be more time taken in getting the raw material and as a result of this the company will
take more time in producing the material (Çalışkan, 2021). This is necessary because of the
reason that when the raw material will come late then the production will take place late and this
will impact the total cycle of production and there will be delay.
D

1
In case the average demand of the chair increases to 45000 units then the EOQ units will
also increase (Sebatjane and Adetunji, 2019). This is particularly because of the reason that when
the annual demand will rise then this will result in increase in EOQ units as well.
2
In case the ordering cost of the company is increased then also the order quantity will be
increased. This is pertaining to the fact that when the order cost will be increased then at that
time the working will be impacted and EOQ will be increasing.
QUESTION B2
Gross margin= Sales – cost of goods
= 250000 – 150000 = 100000
Total expense = variable expense + fixed expense
= 25000 + 35000
= 60000
Current asset = inventory + account rec. + other current
= 10000 + 5000 + 5000
= 20000
Total asset = current asset + fixed asset
= 20000 + 105000
= 125000
Profit = Gross margin – total expense
= 100000 – 60000
= 40000
Profit margin = profit / sales * 100
= 40000 / 250000 * 100
= 16 %
Asset turnover = net sales / total asset
= 250000 / 125000
= 2 times
Return on asset = net income / total asset * 100
= 40000 / 125000 * 100

= 32 %
With the help of the above analysis it is clearly visible that the strategic profit model has
been filled and the profit margin has been calculated. With the above calculation the profit
margin of the company is 16 % which is good and the return on asset is 32 % and this implies
that company is effectively using the asset to generate sales.

REFERENCES
Books and Journals
Çalışkan, C., 2021. The economic order quantity model with compounding. Omega. 102.
p.102307.
Sebatjane, M. and Adetunji, O., 2019. Economic order quantity model for growing items with
imperfect quality. Operations Research Perspectives. 6. p.100088.