Question

13. Suppose Big Box Office Supply (BBOS) purchases 100,000 office chairs every year. Ordering

costs are $95.00 per order and carrying costs are $4.25 per chair. What is BBOS’s total inventory

cost per year, including both carrying costs and ordering costs, if BBOS orders the EOQ of office

chairs? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Answer 1

Solution:

Economic order quantity is calculated using the following formula:

= ( 2AO / C ) ^{( ½ )}

Where A = Annual usage units

O = Ordering cost per Order

C = Annual carrying cost of one unit

In the given question as per the data given:

A = Annual usage units = 100,000

O = Ordering cost per order = $ 95.00

C = Annual Inventory carrying cost of one unit = $ 4.25

Thus Economic order quantity = ( ( 2* 100,000 * $ 95 ) / 4.25 ) ^{( ½ )}  

= ( 19,000,000 / 4.25 ) ^{( ½ )}

= ( 4,470,588.2353 ) ^{( ½ )}

= 2,114.3766 ( when rounded off to four decimal places )

= 2,114.38 ( when rounded off to two decimal places )

= 2,114 orders ( when rounded off to the nearest integer )

Note : The square root of 4,470,588.2353 is calculated using the following formula in excel

=SQRT(Number) = SQRT(4,470,588.2353) = 2,114.3766

Statement showing Inventory Cost at the Economic order quantity:

Sl.No.	Particulars	Amount
1	Ordering Cost ( ( 100,000 / 2114 ) * 95) = $ 4,493.8505 (No. of orders * ordering cost per order ) No. of Orders = Purchase units / EOQ = 100,000/2114	$ 4,493.85
2	Carrying cost of average inventory Here Average inventory = 2,114 Thus Carrying cost =[ (Average inventory * Inventory carrying cost per unit ) ]/ 2 =[( 2114 * 4.25) / 2] = $ 4,492.2500	$ 4,492.25
	Total annual Inventory cost of Economic order quantity	$ 8,986.10