Answer:
a) Additional annual cost = $174.21
b) Additional benefits
- It will also help the company to evaluation of quantity discount offers of the supplier.
- Supports better stock replenishment
Step-by-step explanation:
The additional annual cost i the difference between the Inventory cost using EOQ and the current order size
Total relevant cost is made up of
- Annual ordering cost= (Demand/order size) × Ordering cost per order
- Carrying cost = holding cost per unit per annum × order size/2
Inventory cost using the current order size
Carrying cost = (1,250/2 ×40% × $2.60) = 650
Ordering cost = (630× 12)/1250 × $25 = 151.2
Total cost =$801.2
Inventory cost using Economic order quantity (EOQ)
The Economic Order Quantity (EOG) is the order size that minimizes the balance of ordering cost and holding cost. At the EOQ, the carrying cost is equal to the holding cost.
It is computed using he formulae below
EOQ = (2× Co× D)/Ch
EOQ = √(2×25 ×630× 12)/(40% ×2.60)
= 602.87 units
Carrying cost =(602.87/2 ×40% × $2.60) = 313.49
Ordering cost = (630× 12)/ 602.87 × $25 = 313.49
Total cost =313.49 + 313.49 = $626.99
Additional annual cost = $801.2 - $626.99 = $174.21
Additional benefits
- It will also help the company to evaluate any potential quantity discount being offered by its supplier. Sometimes, suppliers do offer discount for order n excess of the EOQ. So these offers would be best evaluated against the EOQ
- EOQ makes replenishment of stock very easy therefore helping to meet needs of the customers better