Answer:
A. The required order cost per lot is $0.388
B. The required order cost per lot is $0.9216
Explanation:
A. According to the given data Given area of shelf space = 5 Ft * 4 Ft = 20 Sq. Ft
Let us covert it to Sq. inch
1 Ft = 12 Inches
Therefore
, Area of shelf space = 20 *12 * 12 = 2,880 Sq. in
1 can of water takes 20 Sq inch of shelf space
Therefore no. of cans that the shelf space can hold = 2880 / 20 = 144 Cans
Now SH wants to store exact amount of shelf space without needing to store cans somewhere elseand hence this 144 cans becomes EOQ (Economic order Qty.)
Now we know EOQ = √(2KD) / h ----Eq. 1
EOQ = 144
K = Fixed ordering cost = ?
D = Annual demand = 8000
h = Holding cost = ?
C = Cost per can = $ 3
i = 10 % (Carrying cost as percentage of Unit cost)
h = i * C
h = 10 % * $ 3
h = $ 0.3
Substituting above in Eq. 1 and solve for K
EOQ = √ (2KD) / h
144 = √(2 * K * 8000) / 0.3
Squaring both sides we get
20,736 = (16,000 * K ) / 0.3
20,736 * 0.3 = 16,000 * K
K = 6220.8 /16000
K = $ 0.388 = Ordering cost per order
The required order cost per lot is $0.388
B. Here EOQ remains same = 144 But other parameters change
K = Fixed ordering cost = ?
D = Annual demand = 27,000
h = Holding cost = ?
C = Cost per can = $ 12
i = 20 % (Carrying cost as percentage of Unit cost)
h = i * C
h = 20 % * $ 12
h = $ 2.4
Substituting above in Eq. 1 and solve for K
EOQ =√(2KD) / h
144 = √(2 * K * 27,000) / 2.4
Squaring both sides we get
20,736 = ( 54,000 * K ) / 2.4
20,736 * 2.4 = 54,000 * K
K = 49,766.4 /54,000
K = $ 0.9216 = Ordering cost per order
The required order cost per lot is $0.9216
