Question

The following represent four independent situations from which one amount is missing. Products/cases Annual Quantity Carrying (Holding) Cost/Unit Ordering Cost/Order EOQ A 4,500 $1 $? 300 B ? $30 $10 80 C 3,600 $0.12 $6 ? D 3,500 $? $5 125 Required:

1-Calculate the missing figures for each of the four products.

2-Using the EOQ figures , calculate the number of orders that will be placed each year for each of the products

3-Give examples of costs included in annual carrying (holding) costs of stock.

4-Currently the company purchases product C for $5 per unit. The company has been offered a 1 per cent discount on the cost of product C if it places orders in quantities of 1,200. Show the total cost at each of the EOQ & discount. What decision should the company take and why? ( 10 marks)

Answer 1

Answer :

Products / cases	Annual quality	Carrying cost/unit	Ordering cost / order	EOQ
A	4500	$1	10	300
B	9600	$30	$10	80
C	3600	$0.12	$6	600
D	3500	$2.24	$5	125

Calcualtion :

EOQ = Squre root of(2AB/C), where A = annual demand, B = ordering cost per order and C = carrying cost per unit

(2).

Products / cases	Annual demand (1)	EOQ (2)	Number of order per annum (1/2)
A	4500	300	15
B	9600	80	120
C	3600	600	6
D	3500	125	28

(3). Carrying cost of stock will include : The related costs of warehousing, salaries, transportation and handling, taxes and insurance as well as depreciation, shrinkage, ect....

(4)

Particulars	EOQ	Discount
(1). Buying cost per annum	-	-
No of order	6	3
Cost/order ($)	6	6
Total buying cost ($) A	36	18
(2). Carrying cost/annum	-	-
Average inventory	300	600
Carrying cost per unit	0.12	0.12
Carrying cost per annum (B)	36	72
Purcahse cost	18000	17820
Total cost (A + B + C)	18072	17910

The total cost under EOQ and discount as shown above. the best option to the compnay is to accept the discount offer because the company can save $162(18072 - 17910)

Notes :

• Buying cost per annum = No of order per annum*cost/order ($)
• No of order per annum = annual demand /quantity per order
• carrying cost / annum = average inventory*carrying cost per unit
• average inventory = quantity per order /2
• purchase cost = annual demand * cost per unit. under EOQ cost per unit is $5 and under discount it is $4.95