Answer:
Total amount of be saved = $180- $178.8 =$1.11
Explanation:
<em>To determine the amount of savings , we will subtract the total inventory cost under the current order size of 500 units from the total cost using the EOQ.</em>
EOQ is the oder quantity that minimizes carrying cost and ordering cost.
Total cost of the current order size of 500 unit
Currently the total cost = Annual ordering cost + Annual holding cost
<em>Annual ordering cost= (Demand/order size) × Ordering cost per order</em>
=(1000/500) × $40 = $80
<em>Carrying cost = holding cost per unit per annum × order size/2</em>
= 20% × $2 × (500/2)= $100
Total cost =80+ 100 = $180
Total cost using EOQ
EOQ is calculated as follows:
EOQ = (2× Co D)/Ch)^(1/2)
Co- ordering cost Ch - holding cost, D- annual demand
EOQ = √(2× 40×1000/20%×2
EOQ = 447.21 units
Total cost of inventory
Ordering cost = (1000/447.21)×40 = 89.4427191
Holding cost = (447.21/2) * 20% × 2= 89.4427191
Total cost =89.44 + 89.44 = 178.8
Total amount of be saved = $180- $178.8 =$1.11456
