A produce distributor uses 710 packing crates a month, which it purchases at a c

Question

A produce distributor uses 710 packing crates a month, which it purchases at a cost of $10 each. The manager has assigned an annual carrying cost of 35 percent of the purchase price per crate. Ordering costs are $28. Currently the manager orders once a month.

How much could the firm save annually in ordering and carrying costs by using the EOQ? (Round intermediate calculations and final answer to 2 decimal places. Omit the "$" sign in your response.)

A produce distributor uses 710 packing crates a month, which it purchases at a cost of $10 each. The manager has assigned an annual carrying cost of 35 percent of the purchase price per crate. Ordering costs are $28. Currently the manager orders once a month.

How much could the firm save annually in ordering and carrying costs by using the EOQ? (Round intermediate calculations and final answer to 2 decimal places. Omit the "$" sign in your response.)

Explanation / Answer

EOQ calculation:

annual demand = 12*710 = 8,520. order cost = 28. holding cost = 35% * 10 = 3.5

EOQ = (2*annual demand*order cost/holding cost)^1/2

= (2*8520*28/3.5)^1/2 = 369.2154 crates

Current situation is ordering once a month or 12 times a year. Total ordering cost = 12*28 = 336.

holding cost = order quantity/2*holding cost per unit per year = 710/2*3.5 = 1242.5. Total = 336+1242.5 = 1578.50

Costs in case of EOQ: number of orders = annual demand/units per order = 8520/369.2154 = 23.08 orders. Total ordering costs = 23.08*28 = 646.24

holding costs = order quantity/2*holding cost per unit per year = 369.2154/2*3.5 = 646.13

Total ordering cost+holding cost = 646.24+646.13 = 1292.37

savings = total cost in the earlier situation - total cost in case of EOQ

1578.50 - 1292.37 = 286.13

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