Sam’s Auto Shop services and repairs a particular brand of foreign automobile. S

Question

Sam’s Auto Shop services and repairs a particular brand of foreign automobile. Sam uses oil filters throughout the year. The shop operates fifty-two weeks per year and weekly demand is 156 filters. Sam estimates that it costs $18 to place an order and his annual holding cost rate is $3 per oil filter. Currently, Sam orders in quantities of 666 filters.

Calculate the total annual costs associated with Sam’s current ordering policy.

Calculate economic order quantity. units (Round your answer to 2 decimal places, the tolerance is +/-0.01.) LINK TO TEXT

Calculate total annual costs using the EOQ ordering policy. $ (Round your answer to 2 decimal places, the tolerance is +/-0.02.) LINK TO TEXT

Calculate penalty costs Sam is incurring by using his current policy. $ (Round your answer to 2 decimal places, the tolerance is +/-0.04.)

Explanation / Answer

Annual requirement (A) = 156 x 52 = 8,112 units.

Current Ordering costs = (A / Order Size) x Ordering cost per order = (8,112 / 666) x $18 = 12.18 or 13 orders x $18 = $234.

Current holding cost of average inventory = [ (Opening Inventory + Closing Inventory) / 2 ] x $3 = (666 / 2) x $3 = $999.

Total Annual costs of Ordering + Holding = $999 + $234 = $1,233.

EOQ Quantity = Sqrt( 2 x A x O / C) = Sqrt( 2 x 8,112 x $18 / $3) = 312 units.

Ordering cost = (8,112 / 312) x $18 = $468.00

Holding cost = (EOQ / 2) x $3 = $468.00

Annual Cost = Holding + Ordering = $468 + $468 = $936.00

Penalty Costs Sam is incurring by using his current policy = $1,233 - $936 = $297.00

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