Question

- Millbridge Hospital buys 10,000 boxes of latex gloves every year. Each box costs the hospital $7. The cost to place an order for the gloves—which covers the employee staff time, shipping costs, the hospital’s receiving center for inventorying, for example—is estimated at $50 per order. Carrying costs (for storing the boxes, verifying the inventory periodically, etc.) are estimated at 50 cents per box per year. Millbridge uses a 6 percent interest-cost assumption in its calculations. How many boxes should be ordered at a time? How many orders per year should there be? What are the total ordering and carrying costs at the EOQ? Contrast these costs at the EOQ to the total costs if all boxes were simply ordered at the start of the year.

Answer #1

1] | EOQ = (2*A*O/Cu)^0.5, where | |

EOQ = Economic order quanity | ||

A = Annual demand | ||

O = Cost of placing one order | ||

Cu = Carrying cost per unit in $ | ||

Substituting values, | ||

EOQ = (2*10000*50/0.92)^0.5 = | 1,043 | |

Calculation of carrying cost per box: | ||

Carrying cost per box = 0.50+7*6% = $0.92) | ||

Number of boxes to be ordered at a time = EOQ = | 1043 | |

Number of orders = 10000/1043 = | 10 | |

Total ordering cost = 50*10 = | $ 500 | |

Carrying cost = (1043/2)*0.92 = | $ 480 | |

Total ordering and carrying cost | $ 980 | |

2] | Ordering cost [1 order] | $ 50 |

Carrying cost = (10000/2)*0.92 = | $ 4,600 | |

Total ordering and carrying cost | $ 4,650 |

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