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A produce distributor uses 800 packing crates a month, which it purchases at a cost of $10 each. The manager has assigned an annual carrying cost of 35 percent of the purchase price per crate. Ordering costs are $28. Currently the manager orders once a month. How much could the firm save annually in ordering and carrying costs by using the EOQ?

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jepessoa

Answer:

The company could save $364.29 if it used the EOQ

Explanation:

The company uses 800 crates per month(u = 800), so they use 9,600 crates per year: D = 9,600

The holding cost is 35% of the crate's price = 35% x $10 = $3.50 per crate: H = 3.50

Ordering cost is: S = $28.

The actual total annual inventory cost: TC = [(u / 2) x H] + [(D / u) x S] = [(800 / 2) x 3.50] + [(9,600 / 800) x 28] = (400 x 3.5) + (12 x 28) = 1,400 + 336 = $1,736

EOQ = √[(2 x S x D) / H)] = √[(2 x 28 x 9,600) / 3.5] = √(537,600 / 3.5) = √153,600 = 391.92

The total cost using the EOQ = [(EOQ / 2) x H] + [(D / EOQ) x S] = [(391.92 / 2) x 3.5] + [(9,600 / 391.92) x 28] = (195.96 x 3.5) + (24.49  x 28) = 685.86 + 685.85 = $1,371.71

The difference between the actual total cost minus the EOQ cost = $1,736 - $1,371.71 = $364.29