Economic Order Quantity La Cucina Company sells kitchen supplies and housewares.

Question

Economic Order Quantity La Cucina Company sells kitchen supplies and housewares. Lava stone is used in production of molcajetes (mortars and pesties used in the making of guacamole) and is purchased from external suppliers. Each year, 8,200 pounds of lava stone is used; it is currently purchased in lots of 500 pounds. It costs L Cucina $7 to place the order, and carrying cost is $2 per pound per year Required 1. What is the EOQ for lava stone? Round your answer to the nearest whale pound pounds 2. How many orders per year for lava stone will La Cucina place under the EOQ policy? Round your answer to the nearest whale order orders per year )3. What is the tota annual ordering cost of lava stone for a year under the EOQ policy? Round your answer to the nearest dollar is the total annual carrying cost of lava stome per year under the E0Q poliey? Round your answer to the nearest dollac S. What is the total aneual inventory.related cost for lava stone under the EOQ? oF

Explanation / Answer

Answer 1 Economic order quantity (EOQ) is the order quantity of inventory that minimizes the total cost of inventory management. The formula to calculate EOQ is as under, EOQ = SQRT(2*Annual Quantity*Cost per order/Carrying cost per unit) Annual quantity of Lava stone = 8200 pounds Cost per order = $7 Carrying cost per pound = $2 EOQ = SQRT(2*8200 pounds*$7/$2) EOQ = 240 pounds Economic Order quantity = 240 pounds Answer 2 No.of orders per year for lava stone will La Cucina place under EOQ policy = Yearly demand / EOQ No.of orders per year for lava stone will La Cucina place under EOQ policy = 8200 Pounds / 240 Pounds = 34 orders Answer 3 Total annual ordering cost for Lava stone = No.of orders under EOQ policy * Cost per order Total annual ordering cost for Lava stone = 34 orders * $7 = $238 Answer 4 Total annual carrying cost of lava stone = Average Inventory held * Carrying cost per pound Average Inventory held = (0+240)/2 = 120 pounds Total annual carrying cost of lava stone = 120 pounds * $2 = $240 Answer 5 Total annual inventory related cost for lava stone under EOQ policy = Annual ordering cost + Annual Carrying cost Total annual inventory related cost for lava stone under EOQ policy = $238 + $240 = $478

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