The milling corporation has developed a new type of widget. The local distributo
ID: 2701925 • Letter: T
Question
The milling corporation has developed a new type of widget. The local distributor expects to increase his sales by 20% over the past year due to this new development. Last year's sales were $600,000 at a selling price of $100 per unit. A safety stock of 23 units has eliminated stockouts. The carrying costs are $5. The manager would like to cut costs as much as possible and comes to get your advice for the economic ordering quantity. How much should he order?
A) 100 units
B) 155 units
C) 50 units
D) 490 units
*I know that the EOQ formula = %u221A2SO/C with "S" being the anticipated sales, "O" being the ordering costs, and "C" being the carrying costs; however, when I try to plug all of the information in, my answer is very different from the choices provided. Can you explain what I need to do to get the correct answer?
Thanks!
Explanation / Answer
8. The Milling Corp. has developed a new type of widget. The local distributor expects to
Increase his sales by 20% over the past year due to this new development. Last year's sales
Were $50,000 at a selling price of $100 per unit. The manager would like to cut costs as much as possible and comes to you for advice.
Relevant cost information includes:
Warehouse space $2.50 / unit
Material handling expense $1.50 / unit
Insurance premium $1.00 / unit
Total ordering cost $100.00 / per order
a) What is the economic order quantity?
Ans.
Average annual usage of new widget (D) = 500 + 20% of 500 = 510 widgets
Ordering cost per order (S) = $100 per order
Annual carrying cost per bag (H) = $2.50 + $1.50 + $1.00 = $5 per unit
Economic Order Quantity (EOQ) = Sqrt. (2DS / H)
= Sqrt. {(2 * 510 * 100) / $5}
= Sqrt. ($102,000 / 5)
= Sqrt. (20,400)
= 143 widgets (approx.)
b) What is the amount of average inventory?
Ans.
Average amount of inventory = EOQ / 2 = 143 /2 = 71.5 = 72 widgets (Approx.)
c) How many orders will be made per year?
Ans.
Orders per year = D / Q = 510 / 143 = 3.57 orders (per year)
d) What is the total cost of this inventory decision?
Ans.
Total cost of ordering and carrying flour = {{Q/2) * H} + {(D /Q) * S}
= {143/2) * 5} + {(510/143) * 100}
= (71.5 * 5) + (3.57* 100)
= $357.50 + $35750
= $715
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