Problem 1: (16 points) A produce distributor uses 1,600 packing crates a month,
ID: 376638 • Letter: P
Question
Problem 1: (16 points) A produce distributor uses 1,600 packing crates a month, and cach crate is purchased at a cost of S12. The manager has assigned an annual carrying cost of 20 percent of the purchase price per crate. Ordering costs are $22.5. Currently the manager orders once a month. a) What is the Economic Order Quantity (EOQ) for this product? (4 pts) b) How much could the firm save annually in total holding and ordering costs by ordering at the EOQ level? (8 pts) (Show the computations for the ordering, carrying and total holding and ordering costs in detail) o) wat eald tre met caver nnhedgost be by ndering at he 00 evel nsead of d) What would the net change (with its direction) in the carrying cost be by ordering at the EOQ level instead of ordering at the current level? (2 pt)Explanation / Answer
Problem 1-
a-EOQ= 2*Demand*Ordering cost/ holding cost
=2*1600*12*22.5/20% of 12= 864,000/2.4=360,000=600units
b-In EOQ, the company has to place, 1600*12/600=32 orders in a year. ordering cost=32*$22.5=$720
Total holding cost= 600/2*2.4=300*2.4=$720
Total holding and setup cost in EOQ=$720+$720=$1440
In the monthly order model , total number of order made in a year=12, ordering cost=32*12=$384
Monthly consumption=1600 packages and monthly holding cost is 20% of 12/12=2.4/12=0.2
Holding cost per month= 1600/2*0.2=160. holding cost per annum=160*12=$1920.
Total holding and setup cost=$384+$1920=$2304.
Savings due to EOQ=$2304-$1440=$864
c- Net change in ordering cost=$384-$720=-$336. Ordering cost will be increase by $336
d- Net change in holding cost=$1920-$720=-$1200. Holding cost will be decrease by $356