Ottis, Inc., uses 640,000 plastic housing units each year in its production of p

Question

Ottis, Inc., uses 640,000 plastic housing units each year in its production of paper shredders. The cost of placing an order is $30. The cost of holding one unit of inventory for one year is $15.00. Currently, Ottis places 160 orders of 4,000 plastic housing units per year. 1. Compute the annual ordering cost. 2. Compute the annual carrying cost. 3. Compute the cost of Ottis's current inventory policy. Is this the minimum cost? Why or why not? 4. Compute the economic order quantity. 5. Comoute the ordering, carrying, and total costs for the EOQ. 6. How much money does the EOQ policy save the compnay over the policy of purchasing 4000 plastic housing units per order?

Explanation / Answer

1. Number of orders= 640000/4000= 160

Order cost= 160*30= 4800

2. Carrying cost= order quantity/2 *holding cost= 4000/2 *15= 30000

3. Cost of current inventory policy= 4800+30000= 34800

4. EOQ:

5.

6. Saving= 34800-24000= 10800

Annual demand 640000 Order cost 30 Holding cost per unit per year 15 Optimal order quantity = [ 2* annual demand* cost per order/ holding cost per unit per year] ^1/2 Optimal order quantity = [2 *640000*30/15] ^1/2 = 1600

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