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
