Question

EOQ

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

D = 2,880

Q = 120

P = $ 39

C = $ 3.90

Required:

1. For Thomas, calculate the ordering cost, the carrying cost, and the total cost associated with an order size of 120 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 $ 0.39 per order.

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

units

Answer 1

1)

	FORMULA	AMOUNT
ORDERING COST	Number of order placed *per order cost	24*39=936
CARRYING COST	1/2[Carrying cost per unit * inventory carried ]	1/2[3.9*120] 1/2* 468 234
TOTAL COST		1170

Number of order placed =Total demand /quantity per order

                  = 2880 /120

                 = 24 orders

2)

EOQ =SQUARE ROOT OF [2*ANNUAL DEMAND *PER ORDER COST /CARRYING COST PER UNIT]

          =SR[2*2880*39/3.9]

          =SR[224640/3.9]

          =SR[57600]

         = 240 UNITS

Number of order placed =Total demand /quantity per order

                  = 2880 /240

                 = 12 orders

	FORMULA	AMOUNT
ORDERING COST	Number of order placed *per order cost	12*39 =468
CARRYING COST	1/2[Carrying cost per unit * inventory carried ]	1/2[3.9*240] 1/2* 936 468
TOTAL COST		936

3)

EOQ =SQUARE ROOT OF [2*ANNUAL DEMAND *PER ORDER COST /CARRYING COST PER UNIT]

          =SR[2*2880*.39/3.9]

          =SR[2246.4 /3.9]

         =SR[576]

         = 24 Units