Question

CHAP 15 - Q13

13. Calculate economic ordering quantity (EOQ) Inventory costs can be categorized as the costs incurred for holding the inventory, the costs of ordering and receiving the inventory, and the cost of running out of inventory. costs are the direct and indirect costs of keeping inventory on hand. The number of units in the optimal size order is called the economic ordering quantity (E0Q). Murphy Company purchases custom-made durable packing boxes to ship its equipment. Each year, Murphy uses 70,000 boxes. It costs Murphy $42 to place each order, and the purchase price is $1.92 per box. An analysis indicates that carrying costs are 25% of the purchase price. Based on the information provided, solve for the values under Murphy's EOQ policy in the following table, Value EOQ for packing boxes Number of orders per year Total ordering cost for the year Total carrying cost for the year Total inventory-related cost per year

DROPDOWN OPTIONS ARE BELOW THIS

Answer 1

Answer a.

Carrying costs are the direct and indirect costs of keeping inventory on hand.

Answer b.

Annual usage = 70,000 boxes

Cost per box = $1.92

Carrying cost per box = 25% * Cost per box
Carrying cost per box = 25% * $1.92
Carrying cost per box = $0.48

Ordering cost per order = $42

Economic order quantity = [2 * Annual usage * Ordering cost per order / Carrying cost per box]^(1/2)
Economic order quantity = [2 * 70,000 * $42 / $0.48]^(1/2)
Economic order quantity = 3,500 boxes

Number of orders = Annual usage / Economic order quantity
Number of orders = 70,000 / 3,500
Number of orders = 20 orders

Annual ordering cost = Number of orders * Ordering cost per order
Annual ordering cost = 20 * $42
Annual ordering cost = $840.00

Average inventory held = Economic order quantity / 2
Average inventory held = 3,500 / 2
Average inventory held = 1,750 boxes

Annual carrying cost = Average inventory held * Carrying cost per box
Annual carrying cost = 1,750 * $0.48
Annual carrying cost = $840.00

Total inventory related cost = Annual ordering cost + Annual carrying cost
Total inventory related cost = $840.00 + $840.00
Total inventory related cost = $1,680.00