XYZ purchases 20,000 unit of a product each year in lots of 1,000 units per order. The cost of placing an order is $20 and the cost of carrying one unit of product in inventory is $30 per year.
How many orders is placed per year?
What is the total ordering costs per year?
What is the total carrying cost of the inventory per year?
What is the total cost of carrying and ordering for the year?
What is the EOQ amount? What would the total cost of carrying and ordering be for the year if the EOQ amount was used?
1. Number of orders per year = total units purchased/number of units in per order = 20000/1000= 20 orders
2. Total ordering cost = ordering cost per order* number of orders = 20*20=400
3. Total carrying cost = carrying cost per unit*number of units= 30*20000= 600000
4. Total ordering and carrying cost= 400+600000= 600400
5. EOQ= Square root of (2 x demandx ordering cost/carrying cost) = (2*20000*20/30)^(1/2)= 163 units
Total ordering and carrying cost = ((20000/163*20)+(20000*30)= 2454+600000= 602454
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