Question

Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 63,000 units per year, an ordering cost of $4 per order, and carrying costs of $1.40 per unit.

(a) What is the economic ordering quantity?
Economic ordering quantity units
(b) How many orders will be placed during the year?
Number of orders
(c) What will the average inventory be?
Average inventory units
(d) What is the total cost of ordering and carrying inventory? (Omit the "$" sign in your response.)
Total costs $

Answer 1

A.Economic Ordering Quantity =600 units

B.Number of orders= 105 orders

C.Average inventory units=300 units

D.Total cost = $840

Step-by-step explanation:

A. Computation for the economic ordering quantity

Using this formula

EOQ =Sqare root of (2×Annual demand×Ordering cost) /Holding or carrying costs

Where,

Annual demand = 63 000 units

Ordering cost =$4

H = Holding or carrying costs = $1.40

Let plug in the formula

Economic Ordering Quantity =Sqare root of 2×63,000×4/1.4

Economic Ordering Quantity= Square root of 504,000/1.40

EOQ=Square root of 360,000

Economic Ordering Quantity=600 units

b. Computation of how many orders will be placed during the year.

Using this formula

Number of orders = Sales units / EOQ

Let plug in the formula

Number of orders= 63,000 / 600

Number of orders= 105 orders

c. Computation of what the average inventory be

Using this formula

Average inventory units = EOQ / 2

Let plug in the formula

Average inventory units= 600 / 2

Average inventory units=300 units

d. Computation for the total cost of ordering and carrying inventory

First step is to find the Ordering cost

Using this formula

Ordering costs = Number of orders × Cost per order

Let plug in the formula

Ordering costs= 105 × $4 = $420

Second step is to find the Carrying cost

Using this formula

Carrying costs = Average inventory × Carrying cost per unit

Let plug in the formula

Carrying costs = 300× $1.40

Carrying costs =420

Now Let find the Total cost

Using this formula

Total cost = Ordering costs + Carrying costs

Let plug in the formula

Total cost= $420 + 420

Total cost = $840

Therefore in a situation where a firm decide to place an orders based on the EOQ, this means the ordering costs will equal the carrying costs.