Question

A liquid company produces hand sanitizer which has demand of 300,000 units per year.

The production cost of the product is $0.5 per unit.

The company decided to use 10% of the production cost for inventory carrying cost.

At each order, the company needs to pay extra $20 for the paperwork.

Assume that an order replenishes instantaneously. Compute economic order quantity, optimal order interval, and total annual cost.

Answer 1

EOQ = = 15,491.93 units

Optimal order interval 18.8 days (19.36 orders in year)

Total cost = $150,774.60

Step-by-step explanation:

The Economic Order Quantity (EOQ) 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

Co- ordering cost per order- 20,

Ch -Holding cost per unit per annum- 10%× $0.5= 0.05

Annual demand: D- 300,000

EOQ = √(2× 20 * 2,580)/(10%× 0.5)

= 15,491.93 units

Assuming 365 days, the optimal order interval in dates

Number of orders per year

= annual demand/EOQ

= 300,000/ 15,491.93

= 19.36 times

in days:

= EOQ/300,000 × 365 days

= (15,491.93/ 300,000) × 365 days

= 18.8 days

Total annual cost =

Total cost Purchase cost + Carrying cost + ordering cost

$

Purchase cost = $0.5 × 300,000 = 150,000

Carrying cost = (15,491.93/2) * 10%*0.5 = 387.29

Ordering cost = (300,000/15,491.93 ) × 20 = 387.29

Total cost 150,774.60