In: Finance
A vegetable canning company uses 730 shipping crates a month, which it purchases at a cost of $10 each. The manager has assigned an annual carrying cost of 35 percent of the purchase price per crate. Ordering costs are $28. Currently the manager orders once a month. (Round intermediate calculations and final answer to 2 decimal places. )
a. What is the EOQ? EOQ = ____ crates
b. How much could the firm save annually in ordering and carrying costs by using the EOQ? (Round intermediate calculations and final answer to 2 decimal places. Omit the "$" sign in your response.)
Answer a.
Annual usage = 12 * Monthly usage
Annual usage = 12 * 730
Annual usage = 8,760
Carrying cost per crate = 35% * Purchase price per crate
Carrying cost per crate = 35% * $10
Carrying cost per crate = $3.50
Ordering cost = $28
EOQ = (2 * Annual usage * Ordering cost / Carrying cost per
crate)^(1/2)
EOQ = (2 * 8,760 * $28 / $3.50)^(1/2)
EOQ = 140,160^(1/2)
EOQ = 374.38 crate
Answer b.
If order size is 730 crates:
Ordering cost = (Annual usage / Order size) * Ordering
cost
Ordering cost = (8,760 / 730) * $28
Ordering cost = $336
Carrying cost = (Order size / 2) * Carrying cost per crate
Carrying cost = (730 / 2) * $3.50
Carrying cost = $1,277.50
Total cost = Ordering cost + Carrying cost
Total cost = $336 + $1,277.50
Total cost = $1,613.50
If order size is 374.38 crates:
Ordering cost = (Annual usage / Order size) * Ordering
cost
Ordering cost = (8,760 / 374.38) * $28
Ordering cost = $655.16
Carrying cost = (Order size / 2) * Carrying cost per crate
Carrying cost = (374.38 / 2) * $3.50
Carrying cost = $655.17
Total cost = Ordering cost + Carrying cost
Total cost = $655.16 + $655.17
Total cost = $1,310.33
Cost saved = $1,613.50 - $1,310.33
Cost saved = $303.17