Question

The local Toyota dealer has to decide how many spare shock absorbers of a particular type to order for repairing Toyota automobiles. This shock absorber has a demand of four units per month and costs $25 each. The carrying charge is 30 percent per year, and the ordering cost is $15 per order. What is the annual cost of ordering and carrying this part?

Answer 1

To calculate the annual cost of ordering and carrying the spare shock absorbers, you need to consider the ordering cost and the carrying cost. The ordering cost is $15 per order, and the carrying charge is 30% per year. You also need to calculate the economic order quantity (EOQ) to determine the optimal order quantity based on cost considerations.

Step-by-step explanation:

To calculate the annual cost of ordering and carrying the spare shock absorbers, we need to consider the ordering cost and the carrying cost.

The ordering cost is $15 per order, and the carrying charge is 30% per year. Since the demand for the shock absorbers is 4 units per month, the annual demand would be 4 units/month * 12 months = 48 units.

Using the formula for ordering cost: Order Cost = (Annual Demand / Economic Order Quantity) * Ordering cost, we can calculate the annual ordering cost. Assuming the Economic Order Quantity is the optimal order quantity based on cost considerations:

Order Cost = (48 units / EOQ) * $15

The carrying cost can be calculated using the formula: Carrying Cost = (EOQ / 2) * Cost per unit * Carrying Charge

Given that the cost per unit is $25, we can use the carrying cost formula:

Carrying Cost = (EOQ / 2) * $25 * 0.30

Adding the annual ordering cost and carrying cost will give us the annual cost of ordering and carrying the spare shock absorbers.