The daily demand for a particular product is steady at 10 units a day for each o

Question

The daily demand for a particular product is steady at 10 units a day for each of 250 working days (50 weeks) of the year. The product units are currently bought weekly in batches of 400 from a supplier for pound 100 each. The cost of ordering the product units from the supplier is pound 50 regardless of the size of the order. The stockholding cost for one unit for one year is 20% of the unit price. Required: What are the current annual ordering and holding costs? Determine the economic order quantity. What would be the annual stock cost savings for the company if they decide to change its policy and apply economic order quantity? The company can get a discount of 15% if 2,000 or more product units are ordered in one go. Is it worthwhile? Please explain.

Explanation / Answer

a) Ordering Cost -

Total Demand annual - 2500 units. (10*250)

Batch size - 400

No of orders = 2500 / 400 = 6

Ordering cost - 6*50 = 300

B)

C.

Yes it will save money

EOQ D 2500 H £         30.00 K £         20.00 EOQ =                 58

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