Rico Enterprises CC uses the economic order quantity model to establish the reod
ID: 2524782 • Letter: R
Question
Rico Enterprises CC uses the economic order quantity model to establish the reoder quantity for raw material Y. the company holds no buffer inventory. information relating to raw material Y is as follows: annual usage is set at 48 000 units, purchase price $80 per unit, ordering costs $ 120 per order. an annual holding cost is caculated at 10% of the purchase price. the manager recently entered into discussion with the sole supplier of raw material Y and the supplier offered a discount of 5% on the purchase price in each order placed is for 2000 units. REQUIRED: calculate, 1. the EOQ for raw material Y before the discussions. 2. the total annual cost of purchasing raw material Y as it is now 3. the total savings, if any , to Rico Enterprises CC when the accept the offer 4. list one example of holding costs
Explanation / Answer
Req 1: EOQ:
Annual demand (D): 48000 units
Cost price: $ 80 per unit
ordering cocst(O): 120 per order
Holding cost (I): 80*10%: $ 8 per unit
EOQ: (2DO/I)1/2= (2*48000*120 /8)1/2 = 1200 units
Req 2:
Number of orderr: Annual deman/ EOQ = 48000/1200 = 40 orders
Ordering cost: 40 orders* 120 = $ 4800
Holding cost: EOQ /2 * I = 1200/2 * 8= $ 4800
Total Inventory Cost: 48000*80 + Orderin cost+Holding cost =$3840,000+4800+4800= $3849,600
Req 3:
When recieved discount @10%:
Order quantity: 2000 unts
Ordering cost: 48000/2000 *120 = 24 orders@120 = $ 2880
REsvised Holding cost per unit: 8-10%= $ 7.20 per unit
Holding cost: 2000/2 *7.20 = $7200
Inventory cost: 48000*72 +Orderin cost+Holding cost =$ 3456,000+2880+7200= $ 3466,080
Saving in cost: 3849,600 -3466,080 = $ 383520
Req 4:
Holding cost includes the interest on investment blocked in inventory, Storage cost of inventory, etc
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