Item X is a standard item stocked in a company\'s inventory of component parts.
ID: 453152 • Letter: I
Question
Item X is a standard item stocked in a company's inventory of component parts. Each year the firm, on a random basis, uses about 1,700 of item X, which costs $25 each. Storage costs, which include insurance and cost of capital, amount to $4 per unit of average inventory. Every time an order is placed for more item X, it costs $22.
a. Whenever item X is ordered, what should the order size be? (Round your answer to the nearest whole number.)
What is the annual cost for ordering item X? (Round your answer to 2 decimal places.)
c. What is the annual cost for storing item X? (Round your answer to 2 decimal places.)
b.What is the annual cost for ordering item X? (Round your answer to 2 decimal places.)
Explanation / Answer
a)
Annual Demand = 1700
Holding Cost = $ 4
Ordering Cost = $ 22
EOQ = Sqrt((2 * Annual Demand * Ordering cost) / (Holding Cost))
EOQ = Sqrt((2 * 1700 * 22) / 4) = 136.75 = 137
b)
Annual ordering cost = ((Annual Demand / EOQ)*Ordering cost) = ((1700/ 137) * 22) = $ 272.99 = $ 273
c)
Annual Storing Cost = ((EOQ/2) * Holding Cost) = ((137/2)*4) = $274
* NOte : Answer may vary by point because i have used round value of EOQ to calculate Ordering and storing cost.
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