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Power Pumps produces a variety of commercial sump pumps. One of their models—Mighty Mo—is produced in a small plant in Missouri. Next year, Power Pumps anticipates on selling 2,000 units of the Mighty Mo. Each requires six rotors, which Power Pumps purchases from an overseas supplier. The cost of placing an order to this supplier is $250 while the unit cost of the rotor is $60. The holding cost for Power Pumps is 10% of purchasing price. What would be the total annual inventory cost for this part?

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chamberlainuket

Answer:

1000

Explanation:

The economic order quantity is given by the formula = Square root of [ (2 * D * S ) / (H) ]

D = Annual Demand = 2000*6=12000 numbers (six rotor for each pump)

S = Unit Order Cost = $ 250 / order

H = Inventory Holding Cost = 10% of Unit Cost = 10% of 60 = $ 6

The economic order quantity is given by the formula = Square root of [ (2 * D * S ) / (H) ]

Economic Order Quantiity = Squareroot of { (2 * 12000 * 250) / (6) }

Economic Order Quantiity = Squareroot of { 1,000,000 }

Economic Order Quantiity = 1000 numbers.

The total annual inventory cost for this part is $6000.

The annual demand (D) of rotors = 2,000 x 6 = 12,000 units

Holding cost (H) = 10% of purchasing price = 10% of $60 = $6

Ordering cost (Co) = $250

Rotor unit cost = $60

 

The economic order quantity (EOQ) will be:

EOQ = SQRT [(2 x D x Co) / H]

EOQ = SQRT [(2 x 12,000 x $250) / $6]

EOQ = 1,000

The total annual inventory cost will be:

Annual holding cost = (EOQ / 2) x H

= (1000 / 2) x $6

= $3,000

Annual ordering cost = (D / EOQ) x Co

= (12,000 / 1000) x $250

= $3,000

 

Total annual inventory cost will be:

= Annual holding cost + Annual ordering cost

= $3,000 + $3,000

= $6,000

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