Question

3. Calculate the total cost of Orueng all calling utullu P2-2 Economic Order Quantity; Ordering and Carrying Costs LO1 Mayer, Inc. predicts it will use 63,000 units of material during the year. The expected daily usage is 500 units, and there is an expected lead time of five days and a desired safety stock of 1,500 units. The material is expected to cost $5 per unit. Mayer anticipates it will cost $194.45 to place each order. The annual carrying cost is $.50 per unit. Similar to Self- Study Problem 1 Required: 1. Compute the order point. 2. Determine the most economical order quantity by use of the EOQ formula (round to the nearest whole unit). 3. Calculate the total cost of ordering and carrying at the EOQ point.

Answer 1

(a) Calculation of ORDER POINT.

ORDER POINT or REORDER LEVEL = (avg. usage)*(avg. lead time) + safety stock

= (500 * 5) + 1500

= 4,000 units.

(b) ECONOMIC ORDER QUANTITY:

EOQ = under-root of { (2*A*O) / C }

where, A = annual demand of material

O = ordering cost per order

C = annual carrying costs per unit

Hence,

EOQ = under-root of { (2 * 63000 * 194.45) / 0.50 }

EOQ = 7,000 units.

(c) TOTAL ORDERING & CARRYING COSTS:

Formula: OC + CC = under-root of (2 * A * O * C)

Total OC & CC = under-root of (2 * 63000 * 194.45 * 0.50)

Total OC & CC = $ 3,500.

[VERIFICATION OF THE ABOVE FORMULA]:

CARRYING COST = 1/2 * EOQ * CC per unit

= 1/2 * 7000 * 0.50

= $ 1,750.

ORDERING COST = (annual demand / EOQ) * OC per order

= (63000 / 7000) * 194.45

= $ 1,750

Thus, total OC & CC = $ 3,500.