Question

The sales of mouthwash at MARKAL Pharmacy over the past 6 months have average 2,000 cases per month, which is the current order quantity. Markal's cost is $12.00 per case. The company estimates its cost of capital to be 12 percent. Insurance, taxes, breakage, handling, and pilferage are estimated to be approximately 6 percent of item cost. The estimated order cost is $38.00. What is economic order quantity? What is the total inventory cost under economic order quantity? Compare the total cost savings with the current purchase order of 2000 case per month. Show all calculation.

Answer 1

Annual demand for cases = D = 2000 / month x 12 months = 24000

Annual unit holding cost including insurance etc = Ch = ( 12 + 6 ) percent of $12 = 18 percent of $12 = $2.16

Ordering cost = Co = $38

Economic Order quantity = Square root ( 2 x Co x D/ Ch )) = Square root ( 2 x 38 x 24000 /2.16 ) = 918.93 ( 919 rounded to nearest whole number )

Annual ordering cost = Co x D/EOQ = $38 x 24000/919 = $992.38

Annual holding cost = Ch x EOQ/ 2 = $ 2.16 x 919/2 = $992.52

Total inventory cost = Annual ordering cost + Annual holding cost = $992.38 + $992.52 = $1984.90

ECONOMIC ORDER QUANTITY = 919 CASES

TOTAL INVENTORY COST = $1984.90

Scenario : Order quantity of 2000 cases :

Annual ordering cost = Ordering cost x Number of orders = co x annual demand/ Order quantity = $38 x 24000 / 2000 = $456

Annual inventory holding cost = Ch x Average inventory = Ch x Order quantity / 2 = $2.16 x 2000/2 = $2160

Total inventory cost = annual ordering cost + annual holding cost = $456 + $2160 = $2616

Total cost savings with current purchase order of 2000 cases per month = $2616 - $1984.90 = $631.10