Question

Quarter-inch stainless-steel bolts, 1.5 inches long are consumed in a factory at a fairly steady rate of 50 per week. The bolts cost the plant 3 cents each. It costs the plant $10 to initiate an order, and holding costs are based on an annual interest rate of 20 percent.

a. Determine the optimal number of bolts for the plant to purchase and the time between the placement of orders

b. What is the yearly holding and setup cost for this item?

Answer 1

a.

EOQ = 2,944 units

b.

Setup cost = Numbers of Order x Ordering cost = $8.83

Holding Cost = $8.83

Step-by-step explanation:

a.

Economic order quantity is the quantity at which business incur minimum cost. This is the level of order where the holding cost equals to the ordering cost of the business.

As per given data

Annual Demand = 50 per week x 52 weeks in a year = 2,600 bolts

Ordering cost = $10

Carrying cost = $0.03 x 20% = $0.006

EOQ =
`\sqrt{(2 X S X D)/(H) }`

EOQ =
`\sqrt{(2 X 10 X 2,600)/(0.006) }`

EOQ = 2,943.92 = 2,944 units

b.

Setup cost = Numbers of Order x Ordering cost = (2,600 / 2,944) x $10 = $8.83

Holding Cost = (2,944 / 2) x $0.006 = $8.83