Question

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

Answer 1

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