A service garage uses 120 boxes of cleaning cloths a year. The boxes cost $6 each. Ordering cost is $3 and holding cost is 10 percent of purchase cost per unit on an annual basis. Determine: (A) the economic order quantity (B) the total cost of carrying the cloths (excluding purchase price)

Question

Business

Trinity Davenport

27 January, 14:57

A service garage uses 120 boxes of cleaning cloths a year. The boxes cost $6 each. Ordering cost is $3 and holding cost is 10 percent of purchase cost per unit on an annual basis. Determine: (A) the economic order quantity (B) the total cost of carrying the cloths (excluding purchase price)

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Answers (1)

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Charles Richardson · Answer 1

(A) The economic order quantity is 35 units

(B) The total cost of carrying the cloths (excluding purchase price) is $20.78

Explanation:

According to the given data we have the following:

D = Demand rate, units per year = 120

S = Cost per order placed, or setup cost = $3

C = Unit cost, dollars per unit = $6

i = Carrying rate, percent of value per year = 10%

A) Therefore in order to calculate the economic order quantity we have to use the following formula:

economic order quantity is Q = Sqrt [ (2*S*D) / (i*C) ]

Q = Sqrt { (2*3*120) / (10%*6) } = 35 units

B) The total cost of carrying the cloths (excluding purchase price) = Ordering cost+Carrying cost per year

Ordering cost = (cost per order) x orders per year) = SD/Q = 3*120/35 = $10.28

Carrying cost per year = (annual carrying rate) x (unit cost) x average inventory = iCQ/2 = 10%*6*35/2 = $10.5

Therefore, The total cost of carrying the cloths = 10.28+10.50 = $20.78