Ordering and Carrying Costs
Ottis, Inc., uses 741,060 plastic housing units each year in its production of paper shredders. The cost of placing an order is $31. The cost of holding one unit of inventory for one year is $18. Currently, Ottis places 179 orders of 4,140 plastic housing units per year.
1. Compute the annual ordering cost.
2. Compute the annual carrying cost.
3. Compute the cost of Ottis’s current inventory policy.
Is this the minimum cost?
- Select your answer -YesNoItem 4
annual ordering costs = total number of orders x cost of placing an order
= 179 x $31 = $5549
annual carrying costs = average inventory x carrying cost per unit per annum
= (4140/2) x $18 = $37260
cost of inventory = annual ordering costs + annual carrying costs
= $5549 + $37260 = $42809
No, because at the Economic Order Quantity, the associated cost is minimum. At EOQ, the annual ordering costs & annual carrying costs are the same. In this case they aren't therefore, this is not the EOQ.
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