Question

A produce distributor uses 790 packing crates a month, which it purchases at a cost of $10 each. The manager has assigned an annual carrying cost of 39 percent of the purchase price per crate. Ordering costs are $31. Currently the manager orders once a month. How much could the firm save annually in ordering and carrying costs by using the EOQ?

Answer 1

$398.48

Step-by-step explanation:

For calculating the saving amount, first need to calculate the economic order quantity, total cost etc

The economic order quantity is

`= \sqrt{\frac{2* \text{Annual demand}* \text{Ordering cost}}{\text{Carrying cost}}}`

where,

Annual demand is

= 790 packaging crates × 12 months

= 9,480 crates

And, the carrying cost is

= $10 × 39%

= $3.90

`= \sqrt{\frac{2* \text{9,480}* \text{\$31}}{\text{\$3.90}}}`

= 388 units

Now the total cost is

= Annual ordering cost + Annual carrying cost

= Annual demand ÷ Economic order quantity × ordering cost per order + Economic order quantity ÷ 2 × carrying cost per unit

= 9,480 ÷ 388 × $31 + 388 ÷ 2 × $3.90

= $757.42 + $756.60

= $1,514.02

Now the total cost in case of 790 packing crates is

= Annual ordering cost + Annual carrying cost

= Annual demand ÷ Economic order quantity × ordering cost per order + Economic order quantity ÷ 2 × carrying cost per unit

= 9,480 ÷ 790 × $31 + 790 ÷ 2 × $3.90

= $372 + $1,540.50

= $1,912.50

Therefore, the annual saving cost is

= $1,912.50 - $1,514.02

= $398.48