Question

C&A purchases cases of chemicals from ABC who charges $ 30 per order and $ 50 per case. Each case has 5 bags of chemicals . C&A needs 2000 bags of chemicals per year. C&A’s annual holding costs are 30%. If C&A uses the Economic Order Quantity when placing orders. What is the annual ordering and holding cost per case of chemicals ?

Answer 1

Question: C&A purchases cases of chemicals from ABC who charges $ 30 per order and $ 50 per case. Each case has 5 bags of chemicals. C&A needs 2000 bags of chemicals per year. C&A’s annual holding costs are 30%. If C&A uses the Economic Order Quantity when placing orders. What is the annual ordering and holding cost per case of chemicals ?

Answer: $1.5

Explanation:

Given that:

• Number of bags per year = 2000 bags
• Order Cost (S) = $30
• Per Case Cost (C) = $50
• 1 case = 5 bags of chemicals
• Annual Holding Cost (I) = 30%
• Holding Cost (H) = I x C = 30% x $50 = $15

It is given that, each case has 5 bags of chemicals and C&A needs about 2000 bags per year.

Annual Demand (D) = 2000 / 5

Annual Demand (D) = 400

Now:

Economic Order Quantity (EOQ) is given by:

EOQ = Sqrt ( 2 x D x S / H )

Therefore;

EOQ = Sqrt ( 2 x 400 x 30 / 15 )

EOQ = Sqrt ( 1600 )

EOQ = 40

Now:

Annual Holding Cost is given by:

Annual Holding Cost = ( EOQ x H ) / 2

Therefore:

Annual Holding Cost = ( 40 x 15 ) / 2

Annual Holding Cost = 300

Annual Order Cost is given by:

Annual Order Cost = ( D x S ) / EOQ

Therefore:

Annual Order Cost = ( 400 x 30 ) / 40

Annual Order Cost = 300

Now,

Annual Total Cost is given by:

Annual Total Cost = ( D x S ) / EOQ + ( EOQ x H ) / 2

Annual Total Cost = 300 + 300

Annual Total Cost = 600

Here:

Annual Holding Cost and Annual Order Cost Per Case of Chemicals = Annual Total Cost / Annual Demand

Therefore:

Annual Holding Cost and Annual Order Cost Per Case of Chemicals = 600 / 400

Annual Holding Cost and Annual Order Cost Per Case of Chemicals = $1.5