Question

A large law firm uses an average of 50 boxes of copier paper a day. The firm operates 260 days a year. Storage and handling costs for the paper are $40 a year per box, and it costs approximately $70 to order and receive a shipment of paper.

a. What order size would minimize the sum of annual ordering and carrying costs?

b. Compute the total annual cost using your order size from part a

c. Except for rounding, are annual ordering and carrying costs always equal at the EOQ?

d. The office manager is currently using an order size of 200 boxes. The partners of the firm expect the office to be managed “in a cost efficient manner”. Would you recommend that the office manager use the optimal order size instead of 200 boxes? Justify your answer.

Answer 1

At economic order quantity(EOQ) we can minimize the sum of annual ordering and carrying cost

Given

demand = 50 boxes of paper per day

Annual Demand (D) = 50*260= 13000 boxes of paper per year.

Storage & Holding cost(H) = $40

Ordering cost or cost per order(S) = $70

EOQ = 213.31 or 213 boxes

b)

Total cost = annual ordering cost + carrying costs

= (213/2)*40 + (13000/213)*70

= 4260+4272.3

Total annual cost = 8532.3

c) Yes. annual ordering and carrying costs always equal at the EOQ

d) The office manager is currently using an order size of 200 boxes.

Tota cost at order size 200 = (200/2)*40 + 13000/200)*70

= $ 8550

Total cost is high at order quantity at Q = 200 boxes when compare with optimal order size. So office manager should use the optimal order size instead of 200 boxes