A-Tech Company uses 36,000 circuit boards each year in its production of stereo
ID: 2539387 • Letter: A
Question
A-Tech Company uses 36,000 circuit boards each year in its production of stereo units. The cost of placing an order is $15. The cost of holding one unit of inventory for one year is $3. Currently, A-Tech orders 3,000 circuit boards in each order.
1. Compute the annual ordering cost.
2. Compute the annual carrying cost.
3. Compute the cost of A-Tech's current inventory policy.
4. Compute the economic order quantity.
5. Compute the ordering cost and the carrying cost for the EOQ.
$
6. How much money does using the EOQ policy save the company over the policy of purchasing 3,000 circuit boards per order?
7. Conceptual Connection: Suppose that the supplier charges an extra $0.05 per unit to purchase circuit boards in orders of 1,500 or less. Should A-Tech switch to the EOQ policy or not?
Ordering cost $ Carrying cost$
Explanation / Answer
Answer
1.
Annual Ordering Cost = (Total Boards / Boards per order) * cost per order
= (36,000 boards / 3,000 Boards) * $15 per order
Annual Ordering Cost = $180
2.
Annual Carrying Cost = Average Stock *Carrying cost per unit
= (3,000 boards / 2) * $3 per unit
Annual Carrying Cost = $4,500
3.
Cost of current Inventory policy = Annual Ordering cost + Annual Carrying Cost
= 180 + 4,500
Cost of current Inventory policy = $4,680
4.
Annual Demand = 36,000 Boards
Cost per order = $15 per order
Carrying Cost = $3 per unit
EOQ =
=
EOQ = 600
5.
Annual Ordering Cost at EOQ = (Total Boards / Boards per order) * cost per order
= (36,000 boards / 600 Boards) * $15 per order
Annual Ordering Cost = $900
Annual Carrying Cost at EOQ = Average Stock *Carrying cost per unit
= (600 boards / 2) * $3 per unit
Annual Carrying Cost = $900
6.
Money Saved = Cost of Inventory at 3,000 boards per order - Cost of Inventory at EOQ level
= 4,680 – (900 + 900)
Money Saved = $2,880
7.
For this we will have to calculate New EOQ
Annual Demand = 36,000 Boards
New cost per order = 15.05 (15 + 0.05)
Carrying Cost = $3 per unit
EOQ =
=
EOQ = 600.99 or 601 Units
Annual Ordering Cost at EOQ = (Total Boards / Boards per order) * cost per order
= (36,000 boards / 601 Boards) * $15.05 per order
Annual Ordering Cost = $901.49 or 901.5
Annual Carrying Cost at EOQ = Average Stock *Carrying cost per unit
= (601 boards / 2) * $3 per unit
Annual Carrying Cost = $901.5
Money Saved = Cost of Inventory at 3,000 boards per order - Cost of Inventory at EOQ level
= 4,680 – (901.5 + 901.5)
Money Saved = $2,877
Yes company should switch to EOQ as there is a little increase in cost and company still saves money in EOQ
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.