Your family\'s house painting business has decided to try this \"EOQ thing\" you

Question

Your family's house painting business has decided to try this "EOQ thing" you just learned in SCMS 3510. So you open the financials and note the following information:

Three-year average paint consumption: 2685 gallons per year

You use a small warehouse to hold your equipment and paint. From your cost accounting class, you estimate that your holding cost per gallon of paint is $1.90 per year.

Buying the materials needed requires more time than you thought. The part-time person whose only function is to do all of your buying says that she processes 1100 purchase orders per year and her average pay has been $19400 per year.

What is the total cost of one order if you order in quantities equal to the EOQ? (Your answer should have two decimal places)

Explanation / Answer

Solution :

EOQ = Sqrt ( 2 * Demand * Ordering Cost / Holding Cost)

EOQ = Sqrt ( 2 * 2685 * 17.63 / 1.9) = 223.26

Total Cost = Ordering Cost + Holding Cost = Ordering Cost * Demand / EOQ + Holding Cost * EOQ / 2

Total Cost = 17.63 * 2685 / 223.26 + 1.9 * 223.26 / 2 = 424.20

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