Question

# Willy and Tom Limited uses 60000 batteries each year in its production of motorcycles at a...

Willy and Tom Limited uses 60000 batteries each year in its production of motorcycles at a cost of \$450 per battery.The cost of placing an order is \$75.The cost of holding one unit of inventory for one year is 0.05% of the unit purchase price.Currently,Willy and Tom limited places 12 orders of 5000 batteries per year.Compute (A)the cost Willy and Tom current inventory policy.(B)is this the minimum cost? Explain

Requirement A:

Cost of Batteries = 60000*450 = \$ 27,000,000

Cost of placing an order = \$ 75 *12 = \$ 900

Cost of Holding Inventory = 27,000,000*0.05% = \$ 13,500

Total Cost of Current Inventory Policy = \$ 27,014,400

Requirement B:

Minimum cost will be at Economic ordering Quantity.

EOQ is the ideal order quantity a company should purchase to minimize inventory costs such as holding costs, shortage costs, and order costs.

EOQ = Square root of ( 2* demand* order cost /holding cost per unit per annum)

EOQ = Square root of ( (2 *60000*75)/0.225) = 6325 units

so the company will incur minimum costs if it order 6325 units

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