*Please show all work for every step!!* Had to post twice because unclear of how
ID: 377719 • Letter: #
Question
*Please show all work for every step!!* Had to post twice because unclear of how someone got the answers!
A produce distributor uses 1,600 packing crates a month, and each crate is purchased at a cost of $12. The manager has assigned an annual carrying cost of 20 percent of the purchase price per crate. Ordering costs are $22.5. Currently the manager orders once a month.
a) What is the Economic Order Quantity (EOQ) for this product? (4 pts) Show work
b) How much could the firm save annually in total holding and ordering costs by ordering at the EOQ level? (8 pts) (Show the computations for the ordering, carrying and total holding and ordering costs in detail) Show work
c) What would the net change (with its direction) in the ordering cost be by ordering at the EOQ level instead of ordering at the current level? (2 pt) Show work
d) What would the net change (with its direction) in the carrying cost be by ordering at the EOQ level instead of ordering at the current level? (2 pt) Show work
Explanation / Answer
Monthly demand = 1600 crates
Annual demand (D) = 1600 x 12 months = 19200 crates
Ordering cost (S) = $22.5
Holding cost (H) = 20% of cost = 20% of $12 = $2.4
The manager currently orders once in a month. So in the current policy the order quantity(Q) = monthly demand = 1600 crates.
a) Economic order quantity(Q*) = sqrt of (2DS /H)
= sqrt of [(2 x 19200 x 22.5) / 2.4]
= sqrt of 360000
= 600 crates
b)With EOQ,
Annual Ordering cost = (D/Q*) S = (19200/600)22.5 = $720
Annual holding cost = (Q*/2)H = (600/2)2.4 = $720
Total annual cost = Ordering cost + Holding cost
= $720 + $720
= $1440
With the current policy,
Annual Ordering cost = (D/Q) S = (19200/1600)22.5 = $270
Annual holding cost = (Q /2)H = (1600/2)2.4 = $1920
Total annual cost = Ordering cost + Holding cost
= $270 + $1920
= $2190
Annual savings = Total cost with current policy - Total cost with EOQ
= $2190 - $1440
= $750
C) The ordering cost with EOQ = $720
The ordering cost with current policy = $270
So by ordering at EOQ the ordering cost will increase by $720-$270 = $450
d) Carrying cost with EOQ = $720
Carrying cost with current policy = $1920
So by ordering at EOQ the carrying cost will decrease by $1920-$720 = $1200
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