In: Accounting
Par Uno Inc. is a distributor of golf balls. Comprabola's Golf Supplies is a local retail outlet which sells golf balls. Comprabola's purchases the golf balls from Par Uno Inc. at $0.75 per ball; the golf balls are shipped in cartons of 72. Par Uno Inc. pays all incoming freight, and Comprabola's Golf Supplies does not inspect the balls due to Par Uno' reputation for high quality. Annual demand is 155,520 golf balls at a rate of 2,991 balls per week. Comprabola's Golf Supplies earns 12% on its cash investments. The purchase-order lead time is one week. The following cost data are available:
Relevant ordering costs per purchase year order = 125
Carrying costs per carton per year:
Relevant Insurance, Material handling, breakage, etc per year = 0.77
Purchasing at the EOQ recommended level, what are the relevant total costs?
$1,500.00 |
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$1,978.60 |
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$989.37 |
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$3,000.00 |
Before finding EOQ for the company, we have to first find the Annual Demand in terms of cartons:
= 155,520 golf balls / 72 balls per carton
Annual demand (in cartons) = 2160 cartons
Now, we will calculate carrying cost per carton from the given information:
Carrying Cost (per carton) = (Price of a ball x Qty. of balls in one carton x Rate of return on Investment) + Insurance, Handling or breakage
= ($0.75 x 72 balls x 12%) + $0.77
Carrying Cost (per carton) = $7.25 per carton
Also, it is already given in the question that ordering cost per order is $125
Now, we will calculate, Par Uno's EOQ by using following formula:
Economic Order Quantity (EOQ) = [( 2 x Annual Demand of R/M x Ordering cost per order) / Carrying cost per carton per annum ] 1/2
EOQ = [( 2 x 2160 x $125) / $7.25]1/2
= (74,482.7586)1/2
= 272.91529 or 273 cartons is the EOQ
Now, we will calculate relevant toal costs at the recommended EOQ levels
Relevant total cost = Ordering costs + Carrying Cost
where,
Ordering costs = Nos. of order x Per order cost
= (Total demand / EOQ) x per order cost
= (2160 / 273) x $125 per order
= $ 989.0109
Carrying cost = (EOQ/2) x Carrying cost per carton
= (273/2) x $7.25
= $ 989.625
Therefore,
Relevant total cost = $989.625 + $989.0109 = $1,978.6 - Option B is the answer
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