A produce distributor uses 1,200 packing crates a month, and each crate is purch

Question

A produce distributor uses 1,200 packing crates a month, and each crate is purchased at a cost of $16. The manager has assigned an annual carrying cost of 20 percent of the purchase price per crate. Ordering costs are $40. Currently the manager orders once a month. a) What is the Economic Order Quantity (EOQ) for this product? (4 pts) 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) c) What would the net change (with its direction) in the ordering cost be by ordering at the EOQ level? (2 pt) d) What would the net change (with its direction) in the carrying cost be by ordering at the EOQ level? (2 pt)

Explanation / Answer

(a) EOQ = (2*D*O/H)^0.5 = (2*1200*12*40/(20%*16))^0.5 = 600

where D - Annual Demand, O - Ordering cost, H - Inventory Holding Cost per annum

(b) Current Cost => Inventory Holding cost = 1200/2*16*20% = 1920; Ordering Cost = 40*12 = 480. Total Cost = 2400

EOQ model Cost => Inventory Holding cost = 600/2*16*20% = 960; Ordering Cost = 14400/600*40 = 960. Total Cost = 1960

So the firm could save $480 annually by ordering at EOQ level.

(c) As obvious by the calculation of costs in part (b), net change in ordering cost by ordering at EOQ level, is +480.

(d) Net change in carrying cost by ordering at EOQ = -960

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