Question

Old World Charm, Inc. specializes in selling scented candles. The company has established a policy of reordering inventory every other month (which is 6 times per year). A recently employed MBA has considered New England's inventory problem from the EOQ model viewpoint. If the following constitute the relevant data, what is the extra total cost of the current policy compared with the total cost of the optimal policy? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box. Ordering cost = $10 per order Carrying cost = 20% of purchase price Purchase price = $15 per unit Total sales for year = 1,000 units Safety stock = 0

Answer 1

Annual demand = D = 1000/ year

Ordering cost = C₀ = $10

Holding cost = C_c = 20% of $15 = $3 per year

Economic Order Quantity Q* = Square root of (2DC₀ / C_c) = Square root of (2 * 1000 * 10/ 3) = 81.65

Annual Inventory holding cost = Average inventory * Unit carrying cost = (Q*/ 2) * C_c = (81.65/2) * 3 = $122.47

Annual order cost = Number of orders * Cost per order = (D/Q*) C₀ = (1000/81.65) * 10 = $122.47

Hence, Total Annual Cost = Annual Inventory Holding Cost + Annual Order Cost = 122.47 + 122.47 = $244.94