Your family\'s house painting business has decided to try this \"EOQ thing\" you
ID: 388991 • Letter: Y
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: 3115 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 $1.65 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 930 purchase orders per year and her average pay has been $13600 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
Since one needs to spend $13600 for making 930 purchase orders ,
ordering cost = Co = $13600 / 930 = $14.62
Demand for paint = D = 3115 Gallons
Holding cost per Gallon per year = Ch = $ 1.65
Therefore ,
EOQ = square root ( 2 x Co x D/Ch) = square root ( 2 x 14.62 x 3115/1.65 ) = 234.95 Gallons
Number of orders in year = annual demand/ EOQ = 3115/ 234.95 = 13.26
Total cost of one order in quantities equal to EOQ
= annual pay of the ordering person/ number of orders
= $13600 /13.26
= $1025.64
Total cost of one order if order quantity equal to EOQ = $1025.64
Total cost of one order if order quantity equal to EOQ = $1025.64
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