Answer:
A.Economic Ordering Quantity =600 units
B.Number of orders= 105 orders
C.Average inventory units=300 units
D.Total cost = $840
Explanation:
A. Computation for the economic ordering quantity
Using this formula
EOQ =Sqare root of (2×Annual demand×Ordering cost) /Holding or carrying costs
Where,
Annual demand = 63 000 units
Ordering cost =$4
H = Holding or carrying costs = $1.40
Let plug in the formula
Economic Ordering Quantity =Sqare root of 2×63,000×4/1.4
Economic Ordering Quantity= Square root of 504,000/1.40
EOQ=Square root of 360,000
Economic Ordering Quantity=600 units
b. Computation of how many orders will be placed during the year.
Using this formula
Number of orders = Sales units / EOQ
Let plug in the formula
Number of orders= 63,000 / 600
Number of orders= 105 orders
c. Computation of what the average inventory be
Using this formula
Average inventory units = EOQ / 2
Let plug in the formula
Average inventory units= 600 / 2
Average inventory units=300 units
d. Computation for the total cost of ordering and carrying inventory
First step is to find the Ordering cost
Using this formula
Ordering costs = Number of orders × Cost per order
Let plug in the formula
Ordering costs= 105 × $4 = $420
Second step is to find the Carrying cost
Using this formula
Carrying costs = Average inventory × Carrying cost per unit
Let plug in the formula
Carrying costs = 300× $1.40
Carrying costs =420
Now Let find the Total cost
Using this formula
Total cost = Ordering costs + Carrying costs
Let plug in the formula
Total cost= $420 + 420
Total cost = $840
Therefore in a situation where a firm decide to place an orders based on the EOQ, this means the ordering costs will equal the carrying costs.
