Question
In: Operations Management
The cost accounting department has asked you to check their EOQ figures. You have been given...
The cost accounting department has asked you to check their EOQ figures. You have been given the following data:
| Demand | 17,036 units per quarter |
| Setup | $120 per setup |
| Price | $5 per unit |
| Percent of price (I) | 25% per unit per year |
| EOQ | 3,126 units |
Calculate total annual inventor costs including setup, holding and product cost.
*two decimal places
Solutions
Expert Solution
Annual Demand = D= 17,036 units per quarter * 4 quarters = 68,144 units
Setup cost = S = $120 per setup
Price = P = $5 per unit
Percent of price (I) 25% per unit per year
Holding cost = H = 25% * 5 = $1.25
EOQ given = 3,126 units
However, EOQ = 
= 
= 3,617.13 = 3617 units
Hence, the EOQ given is incorrect.
We will calculate Total annual inventory costs for both the EOQs (Given as well as calculated) since it is not specified in question that these costs have to be calculated for which quantity.
Total annual inventory costs for given EOQ (3126 units) = Annual setup costs + Annual holding costs + product cost
Total annual inventory costs = 
= 
= 2,615.89 + 1,953.75 + 3,40,720 = $3,45,289.64
Total annual inventory costs for calculated EOQ (3126 units) = $3,45,289.64
Total annual inventory costs for given EOQ (3617 units) = Annual setup costs + Annual holding costs + product cost
Total annual inventory costs =
= 
= 2,260.79 + 2,260.63 + 3,40,720 = $3,45,241.42
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