Question

In: Accounting

A-Tech Company uses 36,000 circuit boards each year in its production of stereo units. The cost...

A-Tech Company uses 36,000 circuit boards each year in its production of stereo units. The cost of placing an order is $15. The cost of holding one unit of inventory for one year is $3. Currently, A-Tech orders 3,000 circuit boards in each order.

1. Compute the annual ordering cost.

2. Compute the annual carrying cost.

3. Compute the cost of A-Tech's current inventory policy.

4. Compute the economic order quantity.

5. Compute the ordering cost and the carrying cost for the EOQ.

Ordering cost	$
Carrying cost	$

6. How much money does using the EOQ policy save the company over the policy of purchasing 3,000 circuit boards per order?

7. Conceptual Connection: Suppose that the supplier charges an extra $0.05 per unit to purchase circuit boards in orders of 1,500 or less. Should A-Tech switch to the EOQ policy or not?

Expert Solution

Answer

1.

Annual Ordering Cost = (Total Boards / Boards per order) * cost per order

= (36,000 boards / 3,000 Boards) * $15 per order

Annual Ordering Cost = $180

2.

Annual Carrying Cost = Average Stock *Carrying cost per unit

= (3,000 boards / 2) * $3 per unit

Annual Carrying Cost = $4,500

3.

Cost of current Inventory policy = Annual Ordering cost + Annual Carrying Cost

= 180 + 4,500

Cost of current Inventory policy = $4,680

4.

Annual Demand = 36,000 Boards

Cost per order = $15 per order

Carrying Cost = $3 per unit

EOQ =

=

EOQ = 600

5.

Annual Ordering Cost at EOQ = (Total Boards / Boards per order) * cost per order

= (36,000 boards / 600 Boards) * $15 per order

Annual Ordering Cost = $900

Annual Carrying Cost at EOQ = Average Stock *Carrying cost per unit

= (600 boards / 2) * $3 per unit

Annual Carrying Cost = $900

6.

Money Saved = Cost of Inventory at 3,000 boards per order - Cost of Inventory at EOQ level

= 4,680 – (900 + 900)

Money Saved = $2,880

7.

For this we will have to calculate New EOQ

Annual Demand = 36,000 Boards

New cost per order = 15.05 (15 + 0.05)

Carrying Cost = $3 per unit

EOQ =

=

EOQ = 600.99 or 601 Units

Annual Ordering Cost at EOQ = (Total Boards / Boards per order) * cost per order

= (36,000 boards / 601 Boards) * $15.05 per order

Annual Ordering Cost = $901.49 or 901.5

Annual Carrying Cost at EOQ = Average Stock *Carrying cost per unit

= (601 boards / 2) * $3 per unit

Annual Carrying Cost = $901.5

Money Saved = Cost of Inventory at 3,000 boards per order - Cost of Inventory at EOQ level

= 4,680 – (901.5 + 901.5)

Money Saved = $2,877

Yes company should switch to EOQ as there is a little increase in cost and company still saves money in EOQ

ekkarill92 answered 1 year ago

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