Question

A produce distributor uses 773 packing crates a month, which it purchases at a cost of $11 each. The manager has assigned an annual carrying cost of 33 percent of the purchase price per crate. Ordering costs are $28. 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

$\sqrt\frac{2*773*28}{33}$Answer:

Explanation:

Using the EOQ Formula =  EOQ$\sqrt\frac{2*D*O}{H}$

D = Demand = 773

O = Ordering Cost =28

H = holding Cost = 11*33% =3.63

So we have :

EOQ=$\sqrt\frac{2*D*O}{H}$

EOQ= $\sqrt\frac{2*773*28}{3.63}$

EOQ=$\sqrt\frac{43288\\}{3.63}$

EOQ= $\sqrt{11925.06887}$

EOQ= 109.20196

   

Previous per unit order cost = 28/773 =0.03622

No of Orders = D/o  

No of Orders = 773/109.20196 =7.0786

Cost per order =109.20196*0.03622 =3.9555

Total order cost= 7.0786*3.9555=27.9998

At EOQ holding Cost is equal to Order Cost

New Order cost =27.9998

Holding Cost = 27.9998

New cost As per EOQ = 56

Previous (33+28)  =  61

Net Saving = 5