Question

A company manufacturing bicycles has a current annual demand of 1,500 bikes. In buying bike tires, they pay $14 per tire with an estimated carrying cost of 20% of the tire’s cost. Each order cost $25 to process. Orders are placed on the first of each month for an equal amount every month. Determine the current ordering cost, carrying cost and total inventory cost each year using the current order quantity. Calculate the EOQ. Determine the current ordering cost, carrying cost and total inventory cost each year using the quantity found from the EOQ calculation.

Answer 1

Current Ordering System:

Annual Demand (D): 1500 units

ORder each month: 1500 /12 = 125 units

Number f orders: 12 orders

Inventory cost per unit: $ 14 per unit

Purchase cost of total demand: 1500 units @$14= $ 21,000

Ordering cost per order (O)= $ 25 per order

Carrying cost per unit:$14 *20% = $ 2.80 per unit

Current Ordering cost: Number of orders * Ordering cost per order: 12 * 25 = $ 300

Carrying cost : Average inventory * Carrying cost per unit = 125 /2 * $2.80 = $ 175

Total Current Inventory cost:

Purchase cost:                   $21,000

Add: Carrying cost:            $175

Add: Ordering cost:            $300

Total Inventory cost:          $ 21,475

NOw Cost based EOQ

EOQ: (2DO /I)² = (2*1500*25 /2.80 )² = 164 units

Number of orders : Annual demand / EOQ = 1500/164 = 9.15 orders

Ordering cost: 9.15 orders * Ordering cost per order: $ 228.75

Ccarrying cost: Average inventory *Carrying cost per unit: 164/2 * 2.80 = $229.60

Total Inventory cost under EOQ:

Purchase cost:                   $21,000

Add: Carrying cost:            $229.60

Add: Ordering cost:            $228.75

Total Inventory cost:          $ 21,458.35