Question

A company uses 240 boxes of typing paper each year. The company is trying to determine its optimal order quantity that will minimize its total inventory costs. Each time an order is placed, it costs the company approximately $24 in shipping, receiving and inspecting the goods upon arrival. Since storage space is at premium, the company estimates that it incurs a cost of $20 per box per year. What is the total minimal inventory cost that will be incurred as a result of using the optimal order quantity?

Answer 1

$480

Step-by-step explanation:

a. The computation of the economic order quantity is shown below:

=
`\sqrt{\frac{2* \text{Annual demand}* \text{Ordering cost}}{\text{Carrying cost}}}`

=
`\sqrt{\frac{2* \text{240}* \text{\$24}}{\text{\$20}}}`

= 24 boxes

The number of orders would be equal to

= Annual demand ÷ economic order quantity

= $240 ÷ 24 boxes

= 10 orders

The average inventory would equal to

= Economic order quantity ÷ 2

= 24 boxes ÷ 2

= 12 boxes

So, The total cost of ordering cost and carrying cost equals to

Ordering cost = Number of orders × ordering cost per order

= 10 orders × $24

= $240

Carrying cost = average inventory × carrying cost per unit

= 12 units × $20

= $240

So, the total would be

= $240 + $240

= $480