Question

An auto parts shop carries an oil filter for trucks. The annual demand for the oil filter is roughly 1200 units. The ordering cost per order for the auto parts shop is $80; the holding cost of carrying 1 unit is $1.2 per year. The shop has 360 working days per year. The lead time is usually 12 working days. Determine the annual total relevant, including ordering and carrying, cost. g

Answer 1

Answer:

$480

Explanation:

The first step would be to calculate the Economic order quantity. The formula for calculating the economic order quantity is as under:

Step 1: Find Economic Order Quantity

EOQ = Square-root (2* Annual demand * Ordering cost per order / Holding cost per unit per year)

Here

Annual demand is 1200 units

Ordering cost per order is $80

Holding cost per unit per year is $1.2 and

By putting values, we have:

EOQ = Square-root (2 * 1200 Units * $80 / $1.2)

= 400 Units

Step 2: Find Total ordering cost

Now, we will find Total ordering cost by using the following equation:

Total Ordering Cost = Number of Orders * Ordering cost per order

Here

Ordering cost per order is $80

Number of orders = Annual Demand / EOQ = 1200 units / 400 units

Number of orders = 3 orders per year

By putting values in the above equation, we have:

Total Ordering Cost = 3 * 80 = $240

Step 3: Find Annual Carrying Cost

By using the following formula we will find Annual Carrying Cost

Annual Carrying Cost = (EOQ ÷ 2) * Holding cost per unit per year

By putting values we have:

Annual Carrying Cost = (400 ÷ 2) * $1.2  = $240

Step 4: Now we will find Total Annual Inventory Cost by using the following equation:

Total Annual Inventory Cost = Annual ordering cost (Step 2) + Annual carrying cost (Step 3)

By putting values, we have:

Total Annual Inventory Cost = $240 + $240 = $480