3) How much would the total cost to order and store these boxes be reduced if th

Question

3) How much would the total cost to order and store these boxes be reduced if the purchasing manager used the EOQ rather than ordering once a month?

THANKS IN ADVANCE! PLEASE SHOW WORK

A large Internet Retail Distributor uses 24000 boxes each month to pack and ship its goods. The boxes cost $1.20 each.   The company estimates the annual holding cost for a box at 30% of the box cost. The purchasing department of the company estimates that the cost to place an order is $15. 1) The purchasing manager in charge of packing materials currently orders boxes once a month. Using this ordering method what is the annual total cost of ordering and storing these boxes? 2) What would the EOQ be for the boxes?

3) How much would the total cost to order and store these boxes be reduced if the purchasing manager used the EOQ rather than ordering once a month?

THANKS IN ADVANCE! PLEASE SHOW WORK

Explanation / Answer

EOQ= (2xDXS)/H

Where

H= Holding cost =0.40

S= Cost per order = 15

D= Annual Demand = 24000*12 = 288000

EOQ = (2xDXS)/H =(2*288000*15)/0.40 =4647.58

No. of orders done = Demand/EOQ = 288000/4647.58= 61.96

Total annual cost = Annual Holding cost + Annual ordering cost

Annual holding cost is (EOQ/2) x H = (4647.58/2)x0.40 = 929.516

Annual Ordering cost = No. of orders x order cost per order = 61.96*15 = 929.4

So,Total annual cost = 929.516+ 929.4 = 1858.916

In case of ordering once a month

Annual holding cost is (Q/2) x H = (24000/2)*0.4=4800

Annual Ordering cost = No. of orders x order cost per order = 12*15 = 180

Total cost = 4980

Difference between EoQ orders and once a month order = 4980 - 1858.916 = 3121.084

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