Question

2. PC Calculators sell calculators that it purchases for $15 each. It costs PC $60 each time calculators are ordered, and carrying costs are 20% of the calculator's purchase price. Annual demand is 100,000 calculators. (a) Compute the EOQ. (b) Compute the inventory costs if PC orders are at (i) the EOQ amount, (ii) 1000 calculators, (iii) 2500 calculators.

Answer 1

Given: Purchase price = $15, Ordering cost = $60 , Carrying cost = 20 % * $15 = $3

(a) The formula for calculating the EOQ (economic order quantity) is :

EOQ = (2 * Annual demand * cost of placing the order / carrying cost )^1/2

Now, putting the given values in the above equation, we get,

EOQ = (2* $100000 * $60 / $3)^1/2

EOQ = ($12000000 / $3)^1/2

EOQ = ($4000000)^1/2

EOQ = 2000 calculators

(b) Inventory cost = Cost of purchase + Cost of order + Carrying cost

(i) Inventory cost at EOQ units of 2000 is:

Cost of purchase = 2000 * purchase price = $2000 * $15 = $30000

Cost of order = Annual demand / Ordering quantity * cost of placing the order = 100000 / 2000 * 60 = $3000

Carrying cost = 20% of purchase price = 20% * $30000 = $6000

Total cost = $30000 + $3000 + $6000 = $39000

(ii) Inventory cost at 1000 calculators is:

Cost of purchase = 1000 * purchase price = $1000 * $15 = $15000

Cost of order = Annual demand / Ordering quantity * cost of placing the order = 100000 / 1000 * 60 = $6000

Carrying cost = 20% of purchase price = 20% * $15000 = $3000

Total cost = $15000 + $6000 + $3000 = $24000

(iii) Inventory cost at 2500 calculators is:

Cost of purchase = 2500 * purchase price = $2500 * $15 = $37500

Cost of order = Annual demand / Ordering quantity * cost of placing the order = 100000 / 2500 * 60 = $2400

Carrying cost = 20% of purchase price = 20% * $37500 = $7500

Total cost = $37500 + $2400 + $7500 = $47400