Question

Economic Order Quantity

Ottis, Inc., uses 731,025 plastic housing units each year in its production of paper shredders. The cost of placing an order is $30. The cost of holding one unit of inventory for one year is $15. Currently, Ottis places 171 orders of 4,275 plastic housing units per year.

Required:

1. Compute the economic order quantity.

units 1,710

2. Compute the ordering, carrying, and total costs for the EOQ.

Ordering cost	$__________
Carrying cost	12,825
Total cost	$__________

3. How much money does using the EOQ policy save the company over the policy of purchasing 4,275 plastic housing units per order? Round your answer to the nearest dollar

$_________

Answer 1

1. EOQ= Square root of 2* Annual usage * cost of placing an order /carrying cost per unit

= Square root of 2*731025*30/15

= 1710 Units

Number Of orders = Annual consumption/EOQ

= 731025/1710

= 427.5 orders

2) Total Costs = Ordering Cost + Carrying Cost

Ordering cost = Number of orders*cost of placing an Order

=427.5*$30 per order=$12825

Carrying cost =Quantity Ordered/2*Carrying cost per unit

= 1710/2*$15=$12825

Total cost = $25650

3) In the existing policy,

Ordering cost = 171 orders*30=$5130

Carrying costs = 4275/2*15=$32063

Total Costs = $37193

Money saved with the EOQ policy = $37193-$25650 = $11543.