Question

A produce distributor uses 776 packing crates a month, which it purchases at a cost of $9 each. The manager has assigned an annual carrying cost of 36 percent of the purchase price per crate. Ordering costs are $31. Currently the manager orders once a month. How much could the firm save annually in ordering and carrying costs by using the EOQ? (Round intermediate calculations and final answer to 2 decimal places. Omit the "$" sign in your response.) Savings $_________ per year

Answer 1

Answer:

$261.42

Explanation:

economic order quantity (EOQ) = √(2SD/H)

S = cost per order = $31

D = annual demand = 776 x 12 = 9,312

H = holding cost = $9 x 36% = $3.24

EOQ = √[(2 x $31 x 9,312) / $3.24] = √178,192.59 = 422.13 ≈ 422

total ordering and holding costs considering EOQ:

ordering costs = (9,312 / 422) x $31 = $684.06

holding costs = $3.24 x (422/2) = $683.64

total = $1,367.70

current costs:

ordering costs = $31 x 12 = $372

holding costs = $3.24 x (776/2) = $1,257.12

total = $1,629.12

annual savings = $1,629.12 - $1,367.70 = $261.42