Paper is used at a constant rate in an office, at the rate of 10 reams a week. T
ID: 452256 • Letter: P
Question
Paper is used at a constant rate in an office, at the rate of 10 reams a week. The price of a ream of paper is $8. Order cost is $5 per order, and holding cost is $0.50 per ream per year.
If we order 40 reams at a time, what is the holding cost, order cost, and total cost in a year? (do not include the purchase price). How often do we order?
What is the economic order quantity? Using the economic order quantity, what is the holding cost, order cost, and total cost in a year? How often do we order?
Explanation / Answer
Given Information:
Usage rate = 10 reams/week
Therefore Annual Demand (D) = 10*52 = 520 reams / yr
Ordering cost (S) = $5 /order
Holding cost (H) = $ 0.50 per ream per year
a. If the order Quantity is 40 reams (given)
Then Ordering cost will be = D/Q X S = 520/40 X 5 = $65
Holding Cost = Q/2 X H = 40/2 X 0.5 = 10
Total cost = OC + HC = 65 + 10 = $ 75
b How often do we order?
Length = Q/D = 40/ 520 of a year = 40/520 x 52 = 4 weeks
c. Find out EOQ
EOQ = 2DS/H = (2 X 520 x5 )/ 0.5 = 102 reams
Now ordering cost (OC) = D/Q x S = 520/102 x 5 = $ 2.55
Holding Cost (HC) = Q/2 x H = 102/2 X 0.5 = $ 25.5
Total cost = 2.55+ 25.5 = $28.05
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