A manufacturing operation must periodically purchase bulk quantities of bolts. T

Question

A manufacturing operation must periodically purchase bulk quantities of bolts. The bolts are purchased in boxes of 500 and are consumed at a constant rate. The operation expects to purchase 10,000 boxes over the coming year. Each box costs $250, the annual holding cost per box is $12, and the cost of placing an order is $100 (regardless of the quantity ordered). For the following questions, use the basic economic order quantity model (without quantity discounts). 1. What is the economic order quantity (in boxes)? (2pts) 2. Calculate the annual inventory holding costs based on the average inventory level and annual holding cost per box. (2pts) 3. Calculate the annual inventory ordering costs based on the number of orders expected to be placed during the coming year

Explanation / Answer

1) EOQ = Sqrt ( 2 x A x O / C)

Where,

A = Annual demand = 10,000, O = Ordering cost per order = $100, C = holding cost per unit per annum = $12

So, EOQ = Sqrt( 2 x 10,000 x 100 / 12) = 408.25 or 409 units.

2) Annual inventory holding cost of average eoq inventory = ( 0 + 409) / 2 x $12 = $2,454.00

Annual holding cost per box = $2,454 / 409 = $6.00

3) Annual ordering costs = (A / EOQ) x Ordering cost per order = (10,000 / 409) x $100 = $2,500.

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