Using an EOQ analysis (assuming a constant demand), it is determined that the optimal order quantity is 2,500. The company desires a safety stock of 500 units, which results in a total average inventory of 1,750 units. Annual inventory holding costs equal 25% of the average inventory. It costs the company US $4 per unit to buy the product. It costs the company US $150 to place a detailed order, and the annual demand for the product is 48,000 units.

Question

Dexter Lynn

Business

17 May, 13:56

Using an EOQ analysis (assuming a constant demand), it is determined that the optimal order quantity is 2,500. The company desires a safety stock of 500 units, which results in a total average inventory of 1,750 units. Annual inventory holding costs equal 25% of the average inventory. It costs the company US $4 per unit to buy the product. It costs the company US $150 to place a detailed order, and the annual demand for the product is 48,000 units.

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Madden Rasmussen · Answer 1

The question is incomplete; the complete question is given below;

Using an EOQ analysis (assuming a constant demand), it is determined that the optimal order quantity is 2,500. The company desires a safety stock of 500 units, which results in a total average inventory of 1,750 units. Annual inventory holding costs equal 25% of the average inventory. It costs the company US $4 per unit to buy the product. It costs the company US $150 to place a detailed order, and the annual demand for the product is 48,000 units.

Total inventory ordering costs per year equal

Total inventory ordering costs per year equal = $2,880

Explanation:

The total costs associated with inventory is made of the following:

Purchase cost; This is the amount a business pays to its supplier in consideration of the exchange of the goods. Holding cost: This cost of carrying the inventory in the business premises. This includes the cost of insurance, cost of capital invested in the inventory, theft, warehousing e. t. c Ordering cost: the cost associated with placing order. It includes transport cost, other logistics, clerical and administrative costs associated with placing an order.

To calculate the ordering cost, we use the formula below:

Ordering cost = (Annual demand / Order quantity) * Ordering cost per order

Economic Order Quantity (EOQ)

Economic Order Quantity (EOQ); This is the order quantity that minimizes the balance of ordering and holding costs. At this order quantity the total inventory cost is at the lowest, all other things been equal.

So we can apply the ordering cost formula to our question:

Ordering cost = (Annual demand / Order quantity) * Ordering cost per order

Ordering cost = (48,000/2,500) * $150

= $2,880

Total inventory ordering costs per year equal = $2,880