Question

An Ag journalism firm always orders 50 cases of paper from their office supply company. They incur an annual holding cost of $15 per case and have an ordering cost of $25 each time they place an order. If their annual demand is 480 cases, how much could they save annually by switching to their economic order quantity?

a. $25
b. $40
c. $15
d. $80

Answer 1

a. $25

Step-by-step explanation:

Annual requirement = 480 units

Number of orders per year = Annual requirement / Order size per order

= 480 / 50

= 9.6

= 10

So, total ordering cost = Number of orders x ordering Cost per order

= 10 x $25

= $250

Carrying cost of average inventory = Order size / 2 x Carrying cost per unit per annum

= 50 / 2 x $15

= $375

So, Total cost = Ordering cost + Carrying cost

= $250 + $375

= $625

Economic Order Quantity = Square Root of ( 2 x Annual demand x Ordering cost per order / Carrying cost per unit per annum )

= Square Root of ( 2 x 480 x $25 / $15 )

= Square Root of ( 1,600 )

= 40

Number of orders = 480 / 40 = 12 orders

So, Ordering cost = 12 x $25 = $300

Carrying cost of average Inventory = 40 / 2 x $15 = $300

So, Total cost of Inventory = $300 + $300 = $600

So, Cost savings = $625 - $600 = $25 per annum