A wholesale distributor of lenses and frames has been seeking to minimize its in
ID: 2415021 • Letter: A
Question
A wholesale distributor of lenses and frames has been seeking to minimize its inventory costs and is planning to apply the economic order quantity model to its main product, lens blanks. The data in the next column are available for the next year.
Demand 1,000,000 units
Average unit costs $20.00
Cost of ordering $72.00 per order
Unit carrying costs 5% of average per unit cost
Management believes it can reduce the cost of ordering to $50.00 by implementing an online ordering system with the lens manufacturer.
If management does not implement the online ordering system, assume that its EOQ will be 12,000 units.
If, however, management decides to implement the online ordering system, this will change the economic order quantity and save the company ordering costs by what amount?
Increase (Decrease) in EOQ Order Cost Savings (Expenditures) for EOQ Change
2,000 units $(1,000)
600 units $(13,200)
(2,000) units $1,000
1,100 units $22,000
Explanation / Answer
Economic order quantity (EOQ) is the order quantity of inventory that minimizes the total cost of inventory management.
If online ordering system implemented it reduces the cost of ordering to $50.00
EOQ = SQRT(2 × Quantity × Cost Per Order / Carrying Cost Per Order)
= SQRT(2* 10,00,000*50)/20*5%
=10,000 units
Number of orders = Total demand/ order quantity
Hence number of orders will be 10,00,000/10,000 =100
If, management decides to implement the online ordering system, this will reduce the economic order quantity by 2000 units
If online ordering system implemented it reduces the cost of ordering to $50.00
EOQ = SQRT(2 × Quantity × Cost Per Order / Carrying Cost Per Order)
= SQRT(2* 10,00,000*50)/20*5%
=10,000 units
Number of orders if online online order not implimented = Total demand/ order quantity
Hence number of orders will be 10,00,000/12,000 =83.33 = 84 orders
If, management decides to implement the online ordering system, this will reduce the economic ordering cost by $352 [(100 orders- 84 orders)*saving in ordercost(22)(72-50)]
Demand 1,000,000 units Average unit costs $20.00 Cost of ordering $72.00 per order Unit carrying costs 5% of average per unit costRelated Questions
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