Question

Soda Corporation is a manufacturer of cooling products. It purchases 14,400 units of a particular component (CK55) each year at a cost of $60 per unit. Soda Corporation requires a 12% annual rate of return on investment. In addition, relevant carrying costs for insurance, material-handling, breakage are $2.40 per unit per year. Relevant costs per purchase order are $144.

Required:

1. Calculate Soda EOQ for CK55.
2. Calculate Soda total ordering and carrying costs using EOQ.
3. Assume that demand is uniform throughout the year and is known with certainty. The purchasing time is half a month. Calculate Soda reorder point for CK55.

  

Please explain and show all your work clearly. Label steps and final solutions should be clearly identified in bold. Thank you & I’ll make sure to rate! :)

Answer 1

EOQ

Total Ordering Cost

= No: of orders × ordering cost/unit

To Find, No of orders = Annual Demand ÷ Quantity

= 14400 ÷ 1314.53

= 10.95

Therefore ; Total Ordering Cost = 10.95 × 144

= 1577.44

Total Handling cost

= Average inventory × Holding cost/unit

= 1314.53 × 2.40

= 1577.44

Note - Since We are using EOQ, Both total Ordering and holding costs will be same.

Reorder Point

= Daily or Monthly unit sales × Delivery Lead Times (Days or Months)

In order to find Daily unit sales, we assume 360 days in a Year.

Daily unit sales = Annual Demand ÷ 360

= 14400 / 360

= 40

Therefore, Reorder Point = 40 × 15 days

= 600

Hope the answer will be helpful, incase if you need any further information or clarification please let me know in the comment.