Henry Crouch\'s law office has traditionally ordered ink refills 55 units at a t

Question

Henry Crouch's law office has traditionally ordered ink refills 55 units at a time. The firm estimates that carrying cost is 35% of the $9 unit cost and that annual demand is about 235 units per year. The assumptions of the basic EOQ model are thought to apply. For what value of ordering cost would its action be optional?

a) For what value of ordering would its action be optional?

Its action would be optimal given an ordering cost of $---- per order (round your response to two decimal)

b) If the true ordering cost turns out to be much greater than your answer to part (a) what is the impact on the firm's ordering policy?

Explanation / Answer

a. We know that EOQ = (2*annual demand*cost per order/Holding cost)^0.5

Annual demand = 235, holding cost = 35% of $9 = $3.15 and traditional orders = 55 units

Thus 55 = (2*235*cost per order/3.15)^0.5

or 55^2 = (2*235*cost per order/3.15)

or 3025 = 2*235*cost per order/3.15)

or cost per order = $20.27. Thus for ordering cost of $20.27 its action will be optional.

b. If true oerding cost turns out to be much higher then the firm's ordering policy will change and the traditional order quantity of 55 will not be feasible any more. The firm will have to odrer higher quantities per order to ensure that the order is economically feasible.

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