Question

(Best Buy Part A) At a Best Buy store, the forecast for the annual demand of a Motorola cell phone is 15600. Demand forecasts are updated weekly and the unit time is one week. Motorola takes 2 weeks to supply an order and the setup cost is $400 per order. The holding cost rate is 10% and one cell phone costs $50. (Best Buy Part A) (a) What is the total setup cost? [Answer format: two decimal places] (b) What is the total holding cost? [Answer format: integer] (c) What is the total cost? [Answer format: two decimal places] (Note: To avoid rounding errors, use exactly the same order quantity in a previous question.) Write your answer(s) as 1234.56, 7891, 2345.67

Answer 1

Explanation:

a. The computation of the economic order quantity is shown below:

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

$= \sqrt{\frac{2\times \text{\15,600}\times \text{\ 400}}{\text{\ 5}}}$

= 1,580 units

The carrying cost is

= $50 × 10%

= $5

b. The number of orders would be equal to

= Annual demand ÷ economic order quantity

= 15,600 ÷ 1,580

= 9.87 orders

Ordering cost = Number of orders × setup cost per order

= 9.87 orders × $400

= $3,949.37

c. The average inventory would equal to

= Economic order quantity ÷ 2

= 1,580 units ÷ 2

= 790 units

Carrying cost = average inventory × carrying cost per unit

= 790 units × $5

= $3,950

c. Now the total cost

= Setup cost + carrying cost

= $3,949.37 + $3,950

= $7,899.37