Economic Order Quantity Analyze the following scenario: Meals for the Homeless b
ID: 2444933 • Letter: E
Question
Economic Order Quantity
Analyze the following scenario: Meals for the Homeless buys 30,000 large cans of green beans each year. The cost of each can of beans is $4. The cost to place an order for beans, including the time of the employee placing the order, shipping, and so forth, comes to $20 per order. The out-of-pocket carrying costs (for storage, etc.) are $0.30 per can per year. In addition, Meals calculates its interest at 5 percent. How many cans should be ordered at a time? How many orders should there be each year? What are the total ordering costs and carrying costs at the EOQ? Contrast the total of the ordering costs and carrying costs at EOQ to the total ordering and carrying costs if the cans were all ordered at the beginning of the year. (You will need to read and understand Appendix 7-A to complete this discussion). Clearly label the calculations of the economic order quantity using Excel (you may attach your Excel worksheet to your discussion post in your online classroom). Use formulas to calculate the EOQ and format the cells to insert a comma if there is more than three numbers. Round to the nearest whole number. Explain the advantages and disadvantages of EOQ in a Word document not to exceed 200 words.
Economic Order Quantity
Explanation / Answer
Answer
D=Annual Demand 30,000.00 units
Ch=Annual Carrying Cost $0.50 per unit per year
Co=Order Cost $20.00 per order
EOQ = (2*D*Co/Ch)^0.5 1,549.19 units
No of cans ordered at a time 1,549.19 units
No of orders in a year 19.36
Annual ordering cost at EOQ $387.30
Total inventory cost $774.60
If the cans were all ordered at the beginning of the year
No of cans ordered at a time 30,000.00 units .
No of orders in a year 1.00
Annual ordering cost at EOQ $20.00
Annual carrying cost at EOQ $15,000.00
Total inventory cost $15,020.00
Economic Order quantity is the level of inventory that minimizes the holding and ordering cost, where inventory carrying costs are equal to costs.
Advantages of EOQ
The advantage of EOQ is that it helps small business in an effective management of inventory to enhance profits. It help reviewing the inventory on continuous bases and helps to calculate the order item number for a business that results in minimizing the cost and maximizing the profits.
Another advantage is that is reduces the holding cost as it helps recommends the owners the economical number of orders they need to place and keep it in their inventory. The model may recommend the owner to have bulk purchase so as to avoid multiple ordering cost and enjoy great discounts on bulk orders. On the other hand it may also recommends the owner to buy less quantity in order to keep it’s holding cost intact.
Another advantage of this modal is to provide the base of decision for making the best deal for a businessman. It helps you in purchasing the quantity of order that you actually need and prevent you from buying unnecessary orders from the vendors.
Disadvantages
One of the major disadvantages of the EOQ model is that it involves tough and complex mathematical calculations. One needs to have good conceptual knowledge of algebra and related concepts which small business owners do not possess at times so it makes difficult for them to use EOQ model.
Another drawback is that is based on assumptions. It assumes demand of the order remain constant through out the period which is not a right assumption to be made. And it also assumes purchase price of the order won’t change which is not the case. It also assumes fixed cost, holding cost and ordering ng cost will remain unchanged.
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