EOQ for manufacturer. Sk8 Company produces skateboards and purchases 20,000 unit

Question

EOQ for manufacturer. Sk8 Company produces skateboards and purchases 20,000 units of a wheel bearing each year at a cost of $1 per unit. Sk8 requires a 15% annual rate of return on investment. In addition, the relevant carrying cost (for insurance, materials handling, breakage etc.) is $0.17 per unit per year. The relevant ordering cost per purchase order is $38.40. 1. 2. 3. 4. Calculate Sk8's E00 for the wheel bearing. Calculate Sk8's annual relevant ordering costs for the E0Q calculated in requireme Calculate Sk8's annual relevant carrying costs for the E0Q calculated in requireme Assume that demand is uniform throughout the year and known with certainty so safety stocks. The purchase-order lead time is half a month. Calculate Sk8's reorde bearing Step-by-step solution

Explanation / Answer

Question 1). Solution :-

Economic order quantity (EOQ) = (2 * Annual purchase * Ordering cost per order / Carrying cost per unit per annum)1/2

= (2 * 20000 * 38.40 / 0.17)1/2

= (1536000 / 0.17)1/2

= (9035294.11764)1/2

= 3005.88 (Rounded off to 3006 units).

Conclusion :- Economic order quantity (EOQ) = 3006 units. (approx).

Question 2). Solution :- Annual ordering cost = (Annual purchase quantity / EOQ) * Ordering cost per order.

= (20000 / 3006) * 38.40

= 6.65336 (approx) * 38.40

= $ 255.49 (approx).

Conclusion :- Annual relevant ordering cost = $ 255.49 (approx).

Question 3). Solution :- Annual relevant carrying cost = (EOQ / 2) * Carrying cost per unit per year.

= (3006 / 2) * 0.17

= 1503 * 0.17

= $ 255.51

Conclusion :- Annual relevant carrying cost = $ 255.51 (approx).

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