Question

QUESTION 3 * EOQ no Points Wicker uses 20.000 units per year of a particular item of inventory purchased for £1. It costs £28 for each order placed with the supplier and the cost of holding a unit of inventory for a year is £1:20. What is: 1. the economic order quantity? 2. the total annual cost of ordering and holding inventories for this business?

Answer 1

1

EOQ=((2*annual qty*fixed cost per order)/annual holding cost per unit)^(1/2)

EOQ=((2*20000*28)/1.2)^(1/2)

EOQ = 966.1

2

Number of orders = Annual Qty/EOQ

No. of orders = 10/80

No. of orders = 12.5

Average inventory level = EOQ/2

Average inventory level = 966.1/2

Average inventory level = 483.1

Annual ordering cost = Annual Qty/EOQ*fixed cost per order

Annual ordering cost=20000/966.1*28

Annual ordering cost = 579.7

Annual carrying cost = Avg inventory level*annual holding cost

Average carrying cost = 483.1*1.2

Average carrying cost = 579.7

Total cost = Annual ordering cost+Annual carrying cost

Total cost = 579.7+579.7

Total cost = 1159.4