Wood County Hospital consumes 1,000 boxes of bandages per week. The price of bandages is $35 per box, and the hospital operates 52 weeks per year. The cost of processing an order is $15, and the cost of holding one box for a year is 15 percent of the value of the material. a. The hospital orders bandages in lot sizes of 900 boxes. What extra cost does the hospital incur, which it could save by using the EOQ method?

= $367.34

Explanation:

Economic order quantity (EOQ) is the order quantity that minimizes the balance of holding cost and ordering cost. At the EOQ, the holding costs are equal to the ordering costs.

EOQ = (2 * Co * D) / Ch

Total relevant cost of inventory = ordering cost + Holding cost

Step 1

Total cost of inventory under EOQ

EOQ for Wood County

EOQ = 2√ (2 * 15 * 1000 * 52) / (15% * 35)

= 545.10 units

ordering cost = ((1000 * 52) / 545.10) * 15 = 1,430.90

Holding cost = (545.10 / 2) * 15% * 35 = 1,430.90

Total cost = 1430.90 + 1430.90 = $2,861.81

Step 2

Total cost of inventory using order size of 900 boxes

ordering cost = ((1000 * 52) / 900) * 15 = 866.66

Holding cost = (900 / 2) * 15% * 35 = 2,362.5

Total cost = 866.66 + 2,362.5 = $3,229.16

Step 3

Calculate in savings in total costs

Savings = Difference in total inventory cost of EOQ order size and 900 boxes order size:

=$3,229.16-$2,861.81

= $367.34

Savings = $367.34