Problem 1: (16 points) A produce distributor uses 1,600 packing crates a month,
ID: 376705 • 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
1) Demand D = 1600 packing crates per month
Annual demand = 1600 * 12 = 19,200
Cost C = $12
Inventory carrying cost, I = 20% per crate
Ordering cost, S = $22.5 per month
Annual ordering cost = $22.5 * 12 = 270
Q = Sqrt (2 * D * S)/ HC
= Sqrt ( 2 * 19,200 * 270) / 0.2 * 12 = 2078.47
2) Total cost @ EOQ = (D/Q) * S + (Q/2) (IC)
= (19,200/ 2078.47) * 270 + (2078.47/ 2 ) * (0.2 * 12)
= 2494 + 2494 = $4988
Present TC = 19,200 / 1600 * 270 + 1600/2 * 0.2 * 12 = 3240 + 1920 = 5160
Savings = 5160 - 4988 = $172
3) Net change (with its direction) in the ordering cost by ordering at the EOQ level is $172
4)The net change (with its direction) in the carrying cost be by ordering at the EOQ level is $344