Question

A gift shop sells 1000 boxes of scented candles a year. The ordering cost is $50 for scented candles, and holding cost is $10 per box per year. What is the minimum annual amount of these combined costs the gift shop could pay?
a. $100
b. $2000
c. $200
d. $1000
e. $1200

Answer 1

Answer:

d. $1000

Explanation:

Annual demand, D = 1000 boxes

Ordering cost, Co = $50

Holding cost = $10 per box per year

Economic Order Quantity (EOQ) is calculated as;

EOQ = SQRT [(2 x D x Co) / H]

where,

D = Annual demand

Co = Ordering cost

H = Holding cost

Putting the given values in the above formula, we get;

EOQ = SQRT [(2 x 1000 x 50) / 10]

EOQ = 100 boxes

Total ordering cost is calculated as;

Total ordering cost = D/EOQ x Co

Total ordering cost = (1000/100) x 50

Total ordering cost = $500  

Total holding cost is calculated as;

Total holding cost = EOQ/2 x H

Total holding cost = (100/2) x 10 0

Total holding cost = $500

The minimum annual amount of these combined costs the gift shop could pay is;

Minimum annual amount = Total ordering cost + Total holding cost

                                          = $500 + $500          

                                          = $1,000

Therefore, The minimum annual amount of these combined costs the gift shop could pay is $1,000.