Question

Athletic Sports Store sells tennis rackets. The store orders the rackets from a supplier at a cost of $250 per order. The store estimates that the annual carrying cost is 25% of the purchase price, which is $40 per unit per year. The store annual demand is estimated to be 20,000 rackets. What is the EOQ, the total number of orders required during the year, and the total annual cost?

Answer 1

The computations are shown below:

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{20,000}* \text{\$250}}{\text{\$10}}}`

= 1,000 units

The carrying cost is

= $40 × 25%

= $10

b. The number of orders would be equal to

= Annual demand ÷ economic order quantity

= $20,000 ÷ 1,000 units

= 20 orders

The average inventory would equal to

= Economic order quantity ÷ 2

= 1,000 units ÷ 2

= 500 units

d. The total cost of ordering cost and carrying cost equals to

Ordering cost = Number of orders × ordering cost per order

= 20 orders × $250

= $5,000

Carrying cost = average inventory × carrying cost per unit

= 500 units × $10

= $5,000

So, the total would be

= $5,000 + $5,000

= $10,000