Question

A manufacturing company uses 1000 non-returnable special pins a month, which it purchases at a cost of $2 each. The manager has assigned an annual holding cost of 20 percent of the purchase price per pin. Ordering cost is $40 per order. Currently the manager orders 500 pins at a time. How much could the firm save annually in ordering and holding costs by using the EOQ? (Round the final answer to 2 decimal places.) 309.83 619.68 676.15 728.34 None of the above

Answer 1

Answer:

Total amount of be saved = $180- $178.8 =$1.11

Explanation:

To determine the amount of savings , we will subtract the total inventory cost under the current order size of 500 units from the total cost using the EOQ.

EOQ is the oder quantity that minimizes carrying cost and ordering cost.

Total cost of the current order size of 500 unit

Currently the total cost = Annual ordering cost + Annual holding cost

 Annual ordering cost= (Demand/order size) × Ordering cost per order

                               =(1000/500) × $40 = $80

Carrying cost = holding cost per unit per annum × order size/2

                      = 20% × $2 ×  (500/2)= $100

Total cost =80+ 100 = $180

Total cost using EOQ

EOQ is calculated as follows:

EOQ = (2× Co D)/Ch)^(1/2)

Co- ordering cost Ch - holding cost, D- annual demand

EOQ = √(2× 40×1000/20%×2

EOQ = 447.21 units

Total cost of inventory

Ordering cost = (1000/447.21)×40 = 89.4427191

Holding cost =  (447.21/2) * 20% × 2=  89.4427191

Total cost =89.44 + 89.44 = 178.8

Total amount of be saved = $180- $178.8 =$1.11456