Question

Fogle Manufacturing uses 1,700 switch assemblies per week and then reorders another 1,700. The relevant carrying cost per switch assembly is $6.00 and the fixed order cost is $850.

  

What is the current carrying cost? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

What is the order cost? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

What is the EOQ? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Solution :

a. Calculation of current carrying cost :

The formula for calculating Current Carrying cost = [ ( Average inventory * Inventory carrying cost per unit ) ]/ 2

As per the information given in the question we have

Average inventory = 1,700   ;   Inventory carrying cost per unit = $ 6.00   ;

Applying the available information in the formula we have

=[(1700 * 6) / 2]

= $ 10,200 / 2

= $ 5,100

Thus the current carrying cost = $ 5,100

b.Calculation of ordering cost :

The formula for calculating the ordering cost is

Ordering Cost = No. of orders * ordering cost per order

As per the information given in the question we have

No. of annual orders = 52   ( Since an order is placed every week )

Ordering cost per order = $ 850

Applying the available information in the formula we have

= 52 * $ 850

= $ 44,200

Thus the Ordering cost = $ 44,200

c. Calculation of EOQ :

Economic order quantity is calculated using the following formula:

= ( 2AO / C ) ^{( ½ )}

Where A = Annual usage units

O = Ordering cost per order

C = Annual carrying cost of one unit

In the given question as per the data given:

Weekly Usage units = 1,700

A = Annual usage units = 1,700 * 52 weeks = 88,400

O = Ordering cost per order = $ 850

C = Annual Inventory carrying cost of one unit = $ 6.00

Thus Economic order quantity = ( ( 2 * 88,400 * $ 850 ) / 6 ) ^{( ½ )}  

= ( 150,280,000 / 6 ) ^{( ½ )}

= ( 25,046,666.67 ) ^{( ½ )}

= 5,004.664491

= 5,004.66 ( when rounded off to two decimal places )

Thus the EOQ = 5,004.66

Note : The square root of 25,046,666.67 is calculated using the following formula in excel

=SQRT(Number) = SQRT(25,046,666.67) = 5,005.664491