The weekly requirement of a part is 5910 units. The order cost is $260 per order
ID: 459889 • Letter: T
Question
The weekly requirement of a part is 5910 units. The order cost is $260 per order. The holding cost is $10 per unit per year, and the part cost is $850 per unit. The firm operates fifty-two weeks per year.
1. Calculate the following - Economic order quantity, annual holding cost, annual order cost and the annual purchase cost, and inventory turns per year
2. Suppose the firm is currently ordering once every six weeks. How much can the company save per year by using economic order quantity instead of ordering once every six weeks?
Explanation / Answer
EOQ = Sqrt (2 x demand x ordering cost / holding cost) = SQRT (2 x 5910 x 52 x 260 / 10) = 3998
Orders per year = Annual demand / EOQ = 5910 x 52 / 3998 = 77 orders
Annual holding cost = Average inventory x holding cost per unit = (EOQ /2) x 10 = $19990
Annual order cost = cost per order x orders per year = 260 x 77 = $20020
Annual purchase cost = Annual demand x cost per unit = 5910 x 52 x 850 = $261222000
The inventory turnover – We require sales figure for that.
For the second question we require the quantity ordered every six weeks
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