Question

2. A service garage uses 8100 boxes of cleaning cloths a year. Ordering cost is $30 and holding cost is $0.6 on an annual basis. Please compute the following tasks using EOQ model. (a) The economic order quantity based on EOQ model? (b) The total cost of ordering and carrying? (c) Suppose the current order size is 500. What additional annual cost is the company incurring by staying with the order size 500?

Answer #1

A. EOQ = SQRT(2 * DEMAND * ORDERING COST / HOLDING COST)

EOQ = SQRT(2 * 8100 * 30 / 6) = 284.6

B. ANNUAL HOLDING COST = (EOQ / 2) * HOLDING COST

ANNUAL ORDERING COST = (DEMAND / EOQ) * ORDERING COST

ANNUAL HOLDING COST = (284.6 / 2) * 6 = 853.8

ANNUAL ORDERING COST = (8100 / 284.6) * 30 = 853.83

TOTAL COST = AHC + AOC = 853.8 + 853.83 = 1707.63

C. ANNUAL COST OF ORDERING 500 BOXES,

ANNUAL HOLDING COST = (500 / 2) * 6 = 1500

ANNUAL ORDERING COST = (8100 / 500) * 30 = 486

TOTAL COST = AHC + AOC = 1500 + 486 = 1986

ADDITIONAL COST = 1986 - 1707.63 = $ 278.37

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