Question

The Operations Manager for Shadyside Savings & Loan orders cash from her home office for her very popular "BIG BUCKS" automated teller machine, which only dispenses $100 bills. She estimates that this machine dispenses an average of 12,500 bills per month, and that carrying a bill in inventory costs 10 percent of its value annually. She knows that each order for these bills costs $300 for clerical and armored car delivery costs, and that order lead time is six days. Assuming a 30-day month, what is the economic order quantity?

Answer 1

The economic order quantity for ordering 'BIG BUCKS' bills is approximately 2,739 bills.

Step-by-step explanation:

To determine the economic order quantity, we need to use the formula: EOQ = √((2DS)/H), where D represents the annual demand, S represents the cost per order, and H represents the carrying cost per unit. Based on the given information, the annual demand is 12,500 bills, the cost per order is $300, and the carrying cost is 10% of the bill's value per year.

Using the formula, we can calculate the economic order quantity as follows:

EOQ = √((2 * 12,500 * 300)/(0.10 * 100)) = √7,500,000 = 2,738.61

Therefore, the economic order quantity for ordering 'BIG BUCKS' bills is approximately 2,739 bills.

Answer 2

3,000 $100 bills equivalent to $300,000

Step-by-step explanation:

The economic order quantity (EOQ) is the optimum quantity of a good to be purchased or required at a time in order to minimize ordering and carrying costs in inventory.

EOQ = the square root of [(2 times the annual demand in units times the incremental cost to process an order) divided by (the incremental annual cost to carry one unit in inventory)]

• annual demand in units = 12,500 x 12 = 150,000
• incremental costs to process an order = $300
• incremental annual cost to carry one unit in inventory = 10% x 100 = $10

EOQ = √[(2 x 150,000 x $300) / $10] = √($90,000,000 / $10) = √9,000,000 = 3,000 bills