Question

An auto manufacturer uses 500 tons of steel per day. The company pays $1100 per ton of steel purchased, and each order incurs a fixed cost of $2250. The holding cost is $275 per ton of steel per year. Using the EOQ model, calculate the optimal order quantity, cycle length, and average cost per year

Answer 1

Answer:

economic order quantity (EOQ) = √(2SD/H)

D = annual demand = I will assume that the company works during 250 days per year (from Monday to Friday) = 250 x 500 = 125,000

S = order cost = $2,250

H = holding cost = $275

EOQ = √[(2 x 2,250 x 125,000) / 275] = 1,430.19 ≈ 1,430 tons

cycle length:

125,000 / 1,430 = 87.4 purchases per year

365 days / 87.4 = place a purchase order every 4.2 days

total annual cost:

total costs = (87.4 x $2,250) + (125,000 x $1,100) + (1,430/2 x $275) = $196,650 + $137,500,000 + $196,625 = $137,893,275