When the existing system of one order per month is used: Total annual cost = ann
ID: 372886 • Letter: W
Question
When the existing system of one order per month is used:
Total annual cost = annual ordering cost + annual holding cost
Total annual cost = No. of orders* ordering cost + average inventory* holding cost per unit per year
Total annual cost = 12*25 + (777/2)*(.37*10) = $1737.45
When EOQ is used:
EOQ = (2*12*777*25/(.37*10))^.5 = 354.96 units
Total annual cost due to EOQ = No. of orders* ordering cost + average inventory* holding cost per unit per year
Total annual cost due to EOQ = (12*777/354.96)*25 + (354.96 /2)*(.37*10)
Total annual cost due to EOQ = $1313.37
Hence,
Net savings due to the EOQ = 1737.45 - 1313.37 = $424.08
Or,
Net savings due to the EOQ = 424.08
Explanation / Answer
A produce distributor uses 777 packing crates a month, which it purchases at a cost of $10 each. The manager has assigned an annual carrying cost of 37 percent of the purchase price per crate. Ordering costs are $25. Currently the manager orders once a month. How much could the firm save annually in ordering and carrying costs by using the EOQ? (Round intermediate calculations and final answer to 2 decimal places. Omit the "$" sign in your response.)
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