Question

4. A company makes bicycles. It produces 450 bicycles a month. It buys the tires for bicycles from a supplier at a cost of $20 per tire. The company’s inventory carrying cost is estimated to be 15% of cost and the ordering is $50 per order. Calculate the Economic Order Quantity (EOQ). Then from this solution, also calculate the number of orders per year, and average annual ordering cost.

Answer 1

Answer:

Explanation:

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

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

where,

Carrying cost = $20 × 15% = 3

And, the annual demand = 450 bicycles ×  12 months × 2 tyres = 10,800

And, the ordering cost is $50

Now put these values to the above formula  

So, the value would equal to

= $\sqrt{\frac{2\times \text{10,800}\times \text{\ 50}}{\text{\ 3}}}$

= 600 tires

b. The number of orders would be equal to

= Annual demand ÷ economic order quantity

= $10,800 ÷ 600 tires

= 18 orders

c. The average  annual ordering cost would equal to

= Number of orders × ordering cost

= 18 orders × $50

= $900