Question

Your family's house painting business has decided to try this "EOQ thing" you just learned in SCMS 3510. So you open the financials and note the following information:

Three-year average paint consumption: 2090 gallons per year

You use a small warehouse to hold your equipment and paint. From your cost accounting class, you estimate that your holding cost per gallon of paint is $1.65 per year.

Buying the materials needed requires more time than you thought. The part-time person whose only function is to do all of your buying says that she processes 1410 purchase orders per year and her average pay has been $14600 per year.

What are the total annual costs if you order in quantities equal to the EOQ? (Your answer should have two decimal places)

Your Answer:

Answer 1

A = Annual Demand = 2090

O = Ordering cost = 14600 / 1410 = 10.35

C = Carrying cost = 1.65

EOQ = 161.92

no. of orders = A / EOQ

= 2090 / 161.92

= 12.9 (approx 13) orders

Total ordering cost = no. of orders x cost per order

= 13 x 10.35

= 134.55

Total Holding cost = EOQ/2 x holding cost per unit

= 161.92/ 2 x 1.65

= 133.58