Question

3. Calculate the Economic Ordering Quantity (EOQ) model Aa Aa Inventory costs can be categorized as the costs associated with holding the inventory, ordering and receiving the inventory, or running out of the inventory. For example, costs are the direct and indirect costs of keeping inventory on hand. carrying ordering The number of units in the optimal size order is called the economic ordering quantity (EOQ). Jones Company purchases custom-made durable packing boxes to ship its equipment. Each year, Jones uses 180,000 boxes. It costs Jones $108 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 Jones'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

Answer 1

EOQ=√2UO/CS

U=Annual consumption

O=Ordering cost

CS=Carrying cost

Here

U=180,000boxes

O=$108/order

CS=Purchase price×percentage of purchase price considered

as carrying cost

=$1.92×0.25

=$0.48

EOQ=√(2×180,000×108)/0.48

=√38,880,000/0.48

=√81,000,000

=9,000 boxes

Number of orders per year=Annual consumption/EOQ

=180,000/9000

=20 orders

Total ordering cost for the year=Number of orders per year×Ordering cost

=20 Orders×$108

=$2,160

Total carrying cost for the year=180,000boxes×$0.48

=$86,400

Total inventory related cost per year=Avg inventory×Carrying cost per unit

=90,000 boxes×0.48

=$43,200