Question

Myer Holdings Ltd. sells baby comforters. Bird Ltd. manufactures many different baby comforters. Myer Holdings Ltd. orders 21,200 baby comforters per year, 408 per week, at $10 per comforter. Bird Ltd. covers all shipping costs. Myer Holdings Ltd. earns 20% on its cash investments. The purchase-order lead time is 2 weeks. Myer Holdings Ltd. sells 320 baby comforters per week. The following data are available (based on management's estimates):

      Estimated ordering costs per purchase order              $23

      Estimated insurance, materials handling, breakage,

           and so on, per year                                                   $7

      Actual ordering costs per order                                  $27

What is the economic order quantity using the estimated amounts?

	a.	698.3 baby comforters
	b.	232.8 baby comforters
	c.	493.8 baby comforters
	d.	329.2 baby comforters

Answer 1

Correct option is d. 329.2 baby comforters.

Calculation and explanation

ECONOMIC ORDER Quantity is the order Quantity at which the Inventory cost is minimum ie at that Quatity total ordering and handling cost are minimum)

i)Annual order demand (D)= 21200

ii)Estimated Ordering cost (S) =23 per order

iii)Holding / Carrying cost = Required annual return on investment + Estimated Material handling cost

Required Return on investemtn =Cost of material× Rate

=$10×20% =$2

( It is like we purchase inventory instead of invensting it to the source which give the interest of 20% as return, hence such cost is opportunity cost and added to holding cost

Holding cost (H)=$(2+7)=$9

Formula for Economic order Quantity =√(2DS)/H

EOQ=√[2×21200×23]/9

=√975200/9

=√108355.556

=329.174 or 329.2 baby Comforters