Question

QUESTION 2 Bearkat Inc has an annual forecast of 25.000 units and assumes 7% when holding inventory If supplier l offers palm trees for $35.00 per tree and it cost $18.00 to place a purchase order with the company. In addition, the supplier can ship in quantities of 200 trees per truck at a shipment costs of $500 per truck Use the above information to calculate the annual order cost (AOC), TT T Arial 3 (121) TELEP

Answer 1

Annual demand, D = 25,000 units

Inventory holding rate, i = 7%

Unit price = $ 35

Shipment cost is variable, as it depends upon the order quantity, and is in multiples of $ 500 for every 200 units

Effective unit cost including shipment cost, c = 35+500/200 = $ 37.5

Holding cost, H = i*c = 7%*37.5 = $ 2.625

Order cost, S = 18

EOQ = sqrt(2DS/H)

= sqrt(2*25000*18/2.625)

= 586

We round it up to 600 to three full truckloads

Annual order cost = S*D/Q

= 18*25000/600

= $ 750

(NOTE: this is just the cost to place the orders, and does not include the shipment costs. Annual shipment cost = 25000/200*500 = $ 62,500)