You are in charge of ordering items for Boyer’s Department Store, located in Sea
ID: 348245 • Letter: Y
Question
You are in charge of ordering items for Boyer’s Department Store, located in Seattle. For one of the products Boyer’s carries, the Hudson Valley Model Y ceiling fan, you know the following information: annual demand is 4,000; annual holding cost is $15 per fan; and the cost per order is $50. Your predecessor order fans four times a year in quantities of 1,000.
What is the annual holding and ordering costs of your predecessor’s system?
What is the EOQ?
What is the cost difference between your predecessor’s system and EOQ?
Explanation / Answer
Annual demand (D) = 4000
Holding cost (H) = $15
Ordering cost (S) = $50
The predecessor orders fans in quantity of 1000.So for the predecessor order quantity (Q) = 1000 fans
Annual holding cost = (Q/2)H = (1000/2)15 = $7500
Annual Ordering cost = (D/Q)S = (4000/1000)50 = $200
Total annual Holding and ordering cost of the predecessor's system = $7500+$200 = $7700
Economic order quantity (Q*) = sqrt of (2DS /H)
= sqrt of [(2 x 4000 x 50)/15]
= 163.30 or rounded to 163 fans
Total cost with EOQ = Holding cost + ordering cost
= [(Q*/2)H] + [(D/Q*) S]
= [(163/2)15] + [(4000/163)50]
= $1222.5 + $1226.10
= $2448.6
Cost difference = Total cost with predecessor's system - Total cost with EOQ
= $7700 - $2448.6
= $5251.4
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