Question

Lou supplier sells High quality-brand batteries to fishing supplies. The annual demand is approximately 1,200 batteries. The supplier pays $28 for each battery and estimates that the annual holding cost is 30 percent of the battery’s value. It costs approximately $20 to place an order (managerial and clerical costs). The supplier currently orders 100 batteries per month.

1. Determine the ordering, holding, and total inventory costs for the current order quantity.

2. Determine the economic order quantity (EOQ).
3. How many orders will be placed per year using the EOQ?
4. Determine the ordering, holding, and total inventory costs for the EOQ. How has ordering cost changed? Holding cost? Total inventory cost?

Answer 1

	EOQ
	Details
	Current Ordering status
	Annual usgae =1200
	Ordering cost per order=$20
	Carrying cost per unit per year=$28*30%=$8.4
	Current order =100 batteries per month
	No of Current Orders =12
	So Current Ordering Cost =12*20=$240	Ans a
	Average Inventory Holding =100/2=50
	So Current Holding Cost =50*8.4=$420	Ans a
	Price oer battery =$28
	Annual Purchase cost=1200*28=$33,600
	So Current Total Inventory cost=Annual Purchase cost+Annual ordering
	cost +Annual Holding cost=$33,600+$240+$420=$34,260	Ans a.
	Now let us find EOQ
	EOQ = Sq Root of [(2*Ordering cost*Annual usage)/Carrying cost per unit]
	= Sq root [(2*20*1200)/8.4]= Sq Rt 5714.29
	=75.59
a	So EOQ is 75.59	Ans a.
	Annual Consumption =1200,
	So No of orders to be placed =1200/75.59=15.87	Ans b.
	Annual Ordering cost =15.87*20==$317.50	Ans c.
b	Average inventory =EOQ /2= 75.59/2=37.8
	Annual Inventory Holding cost =37.8*8.4=$317.50
	Annual Purchase cost=1200*28=$33,600
	So Current Total Inventory cost=Annual Purchase cost+Annual ordering
	cost +Annual Holding cost=$33,600+$317.5+$317.5=$34,235

	Ans c
	Details	Current ordering system	EOQ system	Change Decrease/(Increase)
	Annual Ordering Cost	$            240.00	$              317.50	$          (77.50)
	Annual Inventory carrying cost	$            420.00	$              317.50	$         102.50
	Annual Purchase cost	$      33,600.00	$        33,600.00	$                  -
	Total Annual Inventory cost	$      34,260.00	$        34,235.00	$            25.00