Question

Widget Co. has the following data available relative to its investment in materials: Number of units of material used annually 20,000 Number of workdays in a year 250 Cost of placing an order $20 Annual carrying cost per unit of inventory $5 Requirements: 1. Compute the economic order quantity (please show your work). EOQ=√(2*20*20,00)/5=400 2. Give some examples of order costs and carrying costs. Order costs: cost of placing a purchase order, cost of inspection of received batches, documentations costs, transporttion cost Carrying costs: 3. Using the above data, compute the order size that results in the minimum total order and carrying cost by completing the following table. Order Size Number of Orders Total Order Cost Average Inventory Total Carrying Cost Total Order and Carrying Costs \ 100 200 300 400 500 600 700 800

I do not understand how to calculate all those things with the information given. Can someone please tell me how to? Thank you

Answer 1

1. Economic Order Quantity =

= = 400 units.

2. Examples of ordering costs might be, cost of placing orders, order processing costs etc.

Examples of carrying costs might be, Storage cost, inventory insurance, loss of interest in money tied up in inventory.

3. Using the given data, the order size that results in the minimum total order and carrying cost can be witnessed in the following table:

You are given with the order sizes, to which you have to apply the above information. In the above information, we are given that total demand was 20,000 units. So number of orders can be found by dividing the annual demand by the order size.

Cost of order is given as $20, to know the total ordering cost, we need to multiply the total no. of orders with the ordering cost of $20.

Average inventory is the average of the opening and closing inventory. Since the order size is same, it can be taken as 50% of one order size.

Inventory carrying cost is given as $5 per unit. Total inventory carrying cost can be calculated by multiplying the average inventory with the carrying cost per unit.

Total ordering and carrying cost can be arrived by adding the total ordering cost and total carrying cost.

From the above table, we can witness that the total order and carrying cost is minimum with an order size of 400 units.

Hope it is helpful!!