Question

A company decides to establish an EOQ for an item. The annual demand is 400,000 units, each costing $9, ordering costs are $35 per order, and inventory carrying costs are 22%. Calculate the following:
a. The EOQ in units
b. Number of orders per year.
c. Cost of ordering, cost of carrying inventory, and total cost

Answer 1

Answer and Explanation:

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

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

$= \sqrt{\frac{2\times \text{400,000}\times \text{\ 35}}{\text{\ 1.98}}}$

= 3,761 units

b. The number of orders would be equal to

= Annual demand ÷ economic order quantity

= 400,000 ÷ 3,761 units

= 106.35 orders

c. The computation of the total cost is shown below:

= Purchase cost + ordering cost + carrying cost

where,  

Purchase cost = Annual consumption × Cost per unit

                       = 400,000 × $9

                       = $2,800,000

Ordering cost = (Annual demand ÷ EOQ) × Cost to place one order

                       = (400,000 ÷ 3,761) × $35

                       = $3,723

Carrying cost = (EOQ ÷ 2) × carrying cost percentage × Cost per unit

                      = (3,761 ÷ 2) × 22% × $9

                      = $3,723

Now put these values to the above formula  

So, the value would equal to

= $2,800,000 + $3,723 + $3,723

= $2,807,446