Question

A service garage uses 120 boxes of cleaning cloths a year. The boxes cost $6 each. Ordering cost is $3 and holding cost is 10 percent of purchase cost per unit on an annual basis. Determine:(A) the economic order quantity (B) the total cost of carrying the cloths (excluding purchase price)

Answer 1

Answer:

(A) The economic order quantity is 35 units

(B) The total cost of carrying the cloths (excluding purchase price) is $20.78

Explanation:

According to the given data we have the following:

D = Demand rate, units per year = 120

S = Cost per order placed, or setup cost = $3

C = Unit cost, dollars per unit = $6

i = Carrying rate, percent of value per year = 10%

A)Therefore in order to calculate the economic order quantity we have to use the following formula:

economic order quantity is Q = Sqrt [(2*S*D)/(i*C)]

Q = Sqrt {(2*3*120)/(10%*6)} = 35 units

B) The total cost of carrying the cloths (excluding purchase price) =Ordering cost+Carrying cost per year

Ordering cost = (cost per order) x orders per year) = SD/Q = 3*120/35 = $10.28

Carrying cost per year = (annual carrying rate) x (unit cost) x average inventory = iCQ/2 = 10%*6*35/2 = $10.5

Therefore, The total cost of carrying the cloths  = 10.28+10.50 = $20.78