Question

1. A company experiences annual demand of 1,000 units for an item that it purchases. The rate of demand per day is very stable, with very little variation from day to day. The item costs $50 to purchase. Ordering costs are $40 and the carrying cost is 25% of the cost of the item. a. How much should the company buy each time an order is placed? b. What is the associated total annual cost (TAC) considering purchase, holding and ordering?

Answer 1

EOQ = 80

TAC = 50512.5

Step-by-step explanation:

Below is the calculation:

Annual Demand = 1000 units

Ordering cost = $40

Holding cost = 25% of 50 = 12.5

Cost per unit = 50

EOQ = SQRT(2 x DEMAND x ORDERING COST / HOLDING COST)

= SQRT(2 x 1000 x 40 / 12.5)

= 80

Number of orders = 1000 / 80 = 12.5

Total annual cost = (50 x 1000) + 12.5 x 40 + 12.5

Total annual cost = 50512.5