Question

Short Grass Incorporated is a distributor of golf balls. Martin's Golf Supplies is a local retail outlet which sells golf balls. Martin's purchases the golf balls from Short Grass Incorporated at $1.15 per ball; the golf balls are shipped in cartons of 72. Short Grass Incorporated pays all incoming freight, and Martin's Golf Supplies does not inspect the balls due to Short Grass' reputation for high quality. Annual demand is 158,520 golf balls at a rate of 3891 balls per week. Martin's Golf Supplies earns 8% on its cash investments. The purchase-order lead time is one week. The following cost data are available: Relevant ordering costs per purchase order $128.00 Carrying costs per carton per year: Relevant insurance, materials handling, breakage, etc., per year $0.87 What is the economic order quantity

Answer 1

Short Grass Incorporated's economic order quantity is 4,602 balls or 64 cartons.

Data and Calculations:

Cost per ball = $1.15

Balls per cartoon = 72

Annual demand = 158,520

Weekly demand = 3,891 balls

The number of cartoons demanded per year = 2,202 (158,520/72)

Earnings on cash investments = 8%

Purchase-order lead time = 1 week

Ordering costs per purchase order = $128,000

Handling costs = $1,916 ($0.87 x 2,202)

The economic order quantity (EOQ) = square root of (2 x Demand x Ordering costs)/Handling costs

= square root of (2 x 158,520 x $128,000)/$1,916

= square root of (21,180,125)

= 4,602 balls or 64 cartons

Thus, the economic order quantity is 4,602 balls or 64 cartons.

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