Question

Cycles de Oro produces 120,000 high-tek bikes a year and orders the brake assembly from IKON for $15.40 each. The order cost is $84 and Cycles estimates their inventory carrying costs are 15%. What is their total ordering cost per year?

Answer 1

Answer:

$3,412

Explanation:

The computation of the economic order quantity is shown below:

= $\sqrt{\frac{2\times \text{Annual demand}\times \text{Ordering cost}}{\text{Carrying cost}}}$

= $\sqrt{\frac{2\times \text{120,000}\times \text{\ 84}}{\text{\ 2.31}}}$

= 2,954 units

The carrying cost is

= $15.40 × 15%

= $2.31

The number of orders would be equal to

= Annual demand ÷ economic order quantity

= 120,000 ÷ 2,954 units

= 40.62 orders

Now The total cost of ordering cost is

Ordering cost = Number of orders × ordering cost per order

= 40.62 orders × $ 84

= $3,412