Question

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.

Required:

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

Answer 1

(1)

annual ordering costs = total number of orders x cost of placing an order

= 179 x $31 = $5549

(2)

annual carrying costs = average inventory x carrying cost per unit per annum

= (4140/2) x $18 = $37260

(3)

cost of inventory = annual ordering costs + annual carrying costs

= $5549 + $37260 = $42809

(4)

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.