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A produce distributor uses 786 packing crates a month, which it purchases at a cost of $9 each. The manager has assigned an annual carrying cost of 35 percent of the purchase price per crate. Ordering costs are $27. 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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Answer:

The firm save $385.308 annually in ordering and carrying costs by using the EOQ

Explanation:

Given:

  • Demand in a month (u) : 786 => the demand in a year (D): 786*12 = 9432
  • The holding cost :35 percent of the purchase price per crate (C) = 0.35*9 =$3.15
  • Ordering costs (O) : $27

To find the money the company can save when ordering based on the EOQ, we use the following formula to find the EOQ:

EOQ = [tex]\sqrt{ \frac{2\times D\times O}{C}}[/tex] = [tex]\sqrt{ \frac{2\times 9432\times 27}{3.15}}=[/tex]    $402.1

  • The total cost using the EOQ

= [(EOQ / 2) x C] + [(D / EOQ) x 0]

= (402.1 /2)*3.15 + (9432 / 402.1) x 27

= $1266.642

  • The actual total annual inventory cost:

TC = [(u / 2) x C] + [(D / u) x O]

=  [(786 / 2) x 3.15] + [(9432 / 786) x 27]

= 1327.95 + 324

= $1651.95

  • The difference between the actual total cost minus the EOQ cost is:

= $1651.95 - $1266.642

=$385.308

So the firm save $385.308 annually in ordering and carrying costs by using the EOQ

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