Lou supplier sells High qualit
Lou supplier sells High quality-brand batteries to fishingsupplies. The annual demand is approximately 1,200 batteries. Thesupplier pays $28 for each battery and estimates that the annualholding cost is 30 percent of the battery’s value. It costsapproximately $20 to place an order (managerial and clericalcosts). The supplier currently orders 100 batteries per month.
- Determine the ordering, holding, and total inventory costs forthe current order quantity.
- Determine the economic order quantity (EOQ).
- How many orders will be placed per year using the EOQ?
- Determine the ordering, holding, and total inventory costs forthe EOQ. How has ordering cost changed? Holding cost? Totalinventory cost?
Answer:
| EOQ | ||
| Details | ||
| Current Ordering status | ||
| Annual usgae =1200 | ||
| Ordering cost perorder=$20 | ||
| Carrying cost per unit peryear=$28*30%=$8.4 | ||
| Current order =100 batteries permonth | ||
| No of Current Orders =12 | ||
| So Current Ordering Cost=12*20=$240 | Ans a | |
| Average Inventory Holding=100/2=50 | ||
| So Current Holding Cost=50*8.4=$420 | Ans a | |
| Price oer battery =$28 | ||
| Annual Purchasecost=1200*28=$33,600 | ||
| So Current Total Inventory cost=AnnualPurchase cost+Annual ordering | ||
| cost +Annual Holdingcost=$33,600+$240+$420=$34,260 | Ans a. | |
| Now let us find EOQ | ||
| EOQ = Sq Root of [(2*Orderingcost*Annual usage)/Carrying cost per unit] | ||
| = Sq root [(2*20*1200)/8.4]= Sq Rt5714.29 | ||
| =75.59 | ||
| a | So EOQ is75.59 | Ans a. |
| Annual Consumption =1200, | ||
| So No of orders to be placed=1200/75.59=15.87 | Ans b. | |
| Annual Ordering cost=15.87*20==$317.50 | Ans c. | |
| b | Average inventory =EOQ /2=75.59/2=37.8 | |
| Annual Inventory Holding cost=37.8*8.4=$317.50 | ||
| Annual Purchasecost=1200*28=$33,600 | ||
| So Current Total Inventory cost=AnnualPurchase cost+Annual ordering | ||
| cost +Annual Holdingcost=$33,600+$317.5+$317.5=$34,235 | ||
| Ans c | ||||
| Details | Current orderingsystem | EOQsystem | ChangeDecrease/(Increase) | |
| Annual Ordering Cost | $ 240.00 | $ 317.50 | $ (77.50) | |
| Annual Inventory carryingcost | $ 420.00 | $ 317.50 | $ 102.50 | |
| Annual Purchase cost | $ 33,600.00 | $ 33,600.00 | $ – | |
| Total Annual Inventorycost | $ 34,260.00 | $ 34,235.00 | $ 25.00 |
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