Question

Sialkot sports purchase tennis balls at 1300 for 12 balls from a manufacturing firm. Sialkot Sports will sell 84000 balls per annum. The total cost to handle a purchase order is Rs 1000. The insurance, property tax, and rent for each dozen tennis balls in the average inventory is Rs 100. The company wants a 10% return on average inventory investment. Required: 1. Compute the economic order quantity. 2. Compute the total annual inventory expenses to sell 84,200 of tennis balls if orders are placed according to economic order quantity computed in part 1.

Answer 1

Solution :-

( 1 )

Economic order quantity

EOQ = ( 2 * A * O / C )^1/2

where A =annual demand

O = ordering cost per order

C = Inventory carrying cost

EOQ = ( 2 * A * O / C )^1/2

= ( 2 * 84,000 * $1,000 / $100 )

= 1,296.15 dozens ( round off )

= 1,296 units approx

(2)

Total inventory cost = Total ordering cost + Total inventory carrying cost = (D/Q)*S + (Q/2)*H

= ( 84,200 / 1,296 ) * $1,000 + ( $1,296 / 2 )* $100

= $64,969.14 + $64,807.41

= $129,776.54 (round off)

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