Question

Mark achin sells 3,600 electric motors each year. the cost of these is $200 each, and demand is constant throughout the year. the cost of placing an order is $40, while the holding cost is $20 per unit per year. there are 360 working days per year and the lead-time is 5 days. if mark orders 200 units each time he places an order, what would his total ordering cost be for the year?a.$2,000b.$2,720c.$200d.$720e.none of these

Answer 1

Summary of information:
total output = 3600 units per year
split into 18 equal orders
cost per order = $40
cost to store a unit for one year = $20
lead time (i.e. storage before shipping) = 5 days

Solution:

quantity split into 18 orders, so 3600/18= 200 units per order.
Order cost = $40 * 18 orders = $720 ..........................(A)
Storage cost:
Each order has 200 units, stored for 5 days = 200*5=1000 unit-days
storage needed for 18 orders = 1000*18 = 18000 unit-days = 50 unit-years
Total storage cost = 50 unit-years * $20 / unit year = $1000...........(B)

Total ordering cost = (A) + (B) = $720+$1000 = $1720