Question

Cornerstone Exercise 20.1 (Algorithmic)
EOQ

Thomas Corporation produces heating units. The following values apply for a part used in their production (purchased from external suppliers):

D = 6,480

Q = 180

P = $ 30

C = $ 3.00

Required:

1. For Thomas, calculate the ordering cost, the carrying cost, and the total cost associated with an order size of 180 units. If required, round your answers to the nearest cent.

Ordering cost	$
Carrying cost
Total cost	$

2. Calculate the EOQ and its associated ordering cost, carrying cost, and total cost. If required, round your answers to the nearest cent.

EOQ		units
Ordering cost	$
Carrying cost
Total cost	$

3. What if Thomas enters into an exclusive supplier agreement with one supplier who will supply all of the demands with smaller, more frequent orders? Under this arrangement, the ordering cost is reduced to $ 0.3 per order.

Calculate the new EOQ. (Round your answer to one decimal place.)

units

Answer 1

Annual Demand, D = 6,480 units
Quantity Ordered, Q = 180 units
Ordering Cost per order, P = $30
Carrying Cost per unit, C = $3.00

Requirement 1:

Ordering Cost = (D / Q) * P
Ordering Cost = (6,480 / 180) * $30
Ordering Cost = $1,080

Carrying Cost = (Q / 2) * C
Carrying Cost = (180 / 2) * $3.00
Carrying Cost = $270

Total Cost = Ordering Cost + Carrying Cost
Total Cost = $1,080 + $270
Total Cost = $1,350

Requirement 2:

EOQ = (2 * D * P / C)^(1/2)
EOQ = (2 * 6,480 * $30 / $3)^(1/2)
EOQ = 129,600^(1/2)
EOQ = 360 units

Ordering Cost = (D / EOQ) * P
Ordering Cost = (6,480 / 360) * $30
Ordering Cost = $540

Carrying Cost = (EOQ / 2) * C
Carrying Cost = (360 / 2) * $3.00
Carrying Cost = $540

Total Cost = Ordering Cost + Carrying Cost
Total Cost = $540 + $540
Total Cost = $1,080

Requirement 3:

Annual Demand, D = 6,480 units
Ordering Cost per order, P = $0.30
Carrying Cost per unit, C = $3.00

EOQ = (2 * D * P / C)^(1/2)
EOQ = (2 * 6,480 * $0.3 / $3)^(1/2)
EOQ = 1,296^(1/2)
EOQ = 36 units