You are managing a company that stocks and distributes hardware. The company emp

Question

You are managing a company that stocks and distributes hardware. The company employs two purchasing agents who receive combined salaries of $90,000. They process 6,000 purchase requests per year. Average inventory in storage is $600,000, and the total cost of running the warehouse is $200,000. You are told that the company purchases 5,000 hammers per year at a cost of $5.34 per hammer.

a. Using the economic order quantity (EOQ) formula, how many hammers should be ordered at one time?

b. If the hammer vendor stated that it would charger $5,00 per hammer if you ordered 200 or more at a time, what should you do?

Explanation / Answer

Order cost = Combined salary of purchasing agents/ number of purchase request

= 90000/6000 = $15

I am considering the average inventory storage as number here

Annual Storage cost = Total warehouse cost/Average inventory Storage

= 200,000/600,000 = $ 0.33

Annual Hammer purchase = 5000

Economic order quantity (EOQ) = [(2 × 5000×15 )/ 0.33] = 674.199

Rounding off EOQ = 675 No.s

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