Henry? Crouch\'s law office has traditionally ordered ink refills 55 units at a

Question

Henry? Crouch's law office has traditionally ordered ink refills 55 units at a time. The firm estimates that carrying cost is 40?% of the ?$11 unit cost and that annual demand is about 240 units per year. The assumptions of the basic EOQ model are thought to apply. For what value of ordering cost would its action be? optimal? ?a) For what value of ordering cost would its action be? optimal? Its action would be optimal given an ordering cost of ?$ nothing per order ?(round your response to two decimal? places). ?b) If the true ordering cost turns out to be much less than your answer to part? (a), what is the impact on the? firm's ordering? policy? A. The order quantity should not be changed. B. The order quantity should be decreased. C. The order quantity should be increased.

Explanation / Answer

Following are the relevant details :

Economic order quantity ( EOQ ) = 55 units

Annual demand = D = 240 units

Annual unit inventory carrying cost = Ch = 40% of $11 unit cost = $4.4

Let the ordering cost = Co

As per EOQ model :

EOQ = Square root ( 2 x Co x D/Ch )

Or, 55 = Square root ( 2 x Co x 240/ 4.4)

Or, 55 = Square root ( 109.09 x Co )

Or, 3025 = 109.09 x Co

Or, Co = 3025/109.09

Or, Co = $27.73 ( rounded to nearest whole number )

ITS ACTION WOULD BE OPTIMAL GIVEN AN ORDERING COST OF $27.73

Since , square root of ordering cost is proportional to the economic order quantity , reduction of ordering cost would result in lesser quantity of economic order quantity.

ANSWER : B) ORDER QUANTITY SHOULD BE DECREASED

ITS ACTION WOULD BE OPTIMAL GIVEN AN ORDERING COST OF $27.73

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