Question

The Talbot Company uses electrical assemblies to produce an array of small appliances. One of the​ assemblies, the XOminus​01, has an estimated annual demand of 12 comma 000 units. The cost to place an order for these assemblies is ​$650​, and the holding cost for each assembly unit is approximately ​$30 per year. The company has 260 workdays per year.

Required:
What are the annual inventory holding costs if Talbot orders using the EOQ​ quantity?

Answer 1

$1,975 per year

Step-by-step explanation:

The first step is to calculate Economic order quantity using the following formula:

Economic Order Quantity = √2DO / H

Here

A is Annual Demand which is 12,000 Units.

O is Ordering Cost per order $650 per order.

H is Holding or Carrying Cost per unit per year is $30 per unit per year.

By putting values, we have:

Economic Order Quantity = √(2 * 12,000 * $650) / 30 = 131.66 units

Now annual inventory holding costs can be calculated using the following formula:

Inventory Holding Cost = Average Inventory * Holding Cost

Here,

Average Inventory = EOQ /2 = 131.66 / 2 = 66 units

By putting values we have:

Annual Inventory Holding Cost = 66 * 20 = $1,975 per year