Question

Problem 1) (12 points) A produce distributor uses 2,560 packing crates a month, and each crate is purchased at a cost of \$16. The manager has assigned an annual carrying cost of 25 percent of the purchase price per crate. Ordering costs are $240 . Currently the manager orders once a month. a) What is the Economic Order Quantity (EOQ) for this product? (4 pts) b) How much could the firm save annually in total holding and ordering costs by ordering at the EOQ level? ( 8 pts) (Show the computations for the total holding and ordering costs in detail)

Answer 1

a) This product's Economic Order Quantity (EOQ) is 1,920 units.

b) The company could save $320 annually in total holding and ordering costs by ordering at the EOQ level.

What is the economic order quantity?

The economic order quantity (EOQ) is the level of inventory units that minimize both holding and ordering costs.

At the EOQ, the total inventory cost for the year is minimized.

Economic Order Quantity (EOQ) = Square root of 2 x Annual Demand x Ordering cost/Holding cost

Annual demand = 30,720 units (2,560 x 12)

Ordering cost per order = $240

Holding cost per unit = $4 ($16 x 25%)

EOQ = Square root of 2 x 30,720 x $240/$4

= Square root of 3,686,400

= 1,920

Number of orders per year = 16 times (30,720/1,920)

Economic Order Quantity:

Total ordering cost = $3,840 (16 x $240)

Total holding cost = EOQ/2 x $4 = $3,840

Total holding and ordering costs under EOQ = $7,680

Normal Order Quantity:

Total ordering cost without EOQ = $2,880 (12 x 240)

Total holding cost without EOQ = $5,120 (2,560/2 x $4)

Total holding and ordering costs without EOQ = $8,000

Savings in total holding and ordering costs by ordering at the EOQ level = $320 ($8,000 - $7,680)

Learn more about the economic order quantity (EOQ) at https://brainly.com/question/13386271

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