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.

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Ottis, Inc., uses 741,060 plastic housing units each year in its
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