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.
1. Compute the economic order quantity.
2. Compute the ordering, carrying, and total costs for the EOQ.
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
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
= 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
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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