Question

A produce distributor uses 774 packing crates a month, which it purchases at a cost of $12 each. The manager has assigned an annual carrying cost of 34 percent of the purchase price per crate. Ordering costs are $29. Currently the manager orders once a month. How much could the firm save annually in ordering and carrying costs by using the EOQ?

Answer 1

Answer:

annual saving = $444.42

Explanation:

given data

monthly demand = 774

purchases  cost =  $12

annual carrying cost = 34 %  of the purchase price

Ordering costs =  $29

solution

we know here annual demand will be = 774 ×  12 = 9288 crates

and

carrying cost = 34 % of $12 = $4.08

so

economic order quantity Q will be

Q = $\sqrt{\frac{2DS}{H}}$    .................1

here D is annual demand and S is ordering cost and H is carrying cost

so put the value we get

Q = $\sqrt{\frac{2*9288*29}{4.08}}$

Q = 363.37 = 363 creates

and

total annual cost with EOQ will be

total annual cost = annual carrying cost + annual ordering cost ...............2

total annual cost = $\frac{Q}{2} H + \frac{D}{Q} S$

put here value we get

total annual cost = $\frac{363}{2} 4.08 + \frac{9288}{363} 29$          

total annual cost = 740.52 + 742.02

total annual cost =  $1482.54

so

order quantity = monthly demand = 774 crates

so total annual cost with current policy is

total annual cost is = annual carrying cost + annual ordering cost

total annual cost is  =  $\frac{Q}{2} H + \frac{D}{Q} S$

put here value we get

total annual cost = $\frac{774}{2} 4.08 + \frac{9288}{774} 29$          

total annual cost = 1578.96 + 348

total annual cost =  $1926.96

so

annual saving = total annual cost with current policy  - total annual cost with EOQ

annual saving = $1926.96 - $1482.54

annual saving = $444.42