1. EOQ (Economic Order Quantity) can be calculated using the formula: EOQ = sqrt(2DS/H), where D is the annual demand, S is the ordering cost per order, and H is the holding cost per unit per year.
Given that D = 50,000, S = 6, and H = 0.02, we can calculate:
EOQ = sqrt(2 * 50,000 * 6 / 0.02)
EOQ = sqrt(6,000,000 / 0.02)
EOQ = sqrt(300,000)
EOQ ≈ 547.72
Therefore, the EOQ for component Z is approximately 547.72 units.
2. Total cost of holding = (H * EOQ) / 2 = (0.02 * 547.72) / 2 = 5.48
Total cost of ordering = (D * S) / EOQ = (50,000 * 6) / 547.72 ≈ 547.72
3. To prove that EOQ is the cheaper option, we can calculate the total cost of ordering and holding for the EOQ quantity of 547.72 units:
Total cost = Total cost of holding + Total cost of ordering
Total cost = 5.48 + 547.72
Total cost ≈ 553.2
Now, let's calculate the total cost if we were to order the entire annual requirement of 50,000 units at once:
Total cost = Holding cost + Ordering cost
Total cost = (0.02 * 50,000) / 2 + (6 * 1)
Total cost = 500 + 6
Total cost = 506
Therefore, we can see that EOQ is the cheaper option as the total cost for ordering 547.72 units (553.2) is less than the total cost for ordering the entire annual requirement of 50,000 units at once (506).
Nellone Co provides the following information:
Tshs
Annual requirement of component Z
50,000
Price per unit
0.12
Holding costs per year per unit
0.02
6
Ordering costs per order
Required:
1. Calculate the EOQ for Z.
2. Calculate the total cost of holding and the total cost of ordering.
3. Prove that EOQ is the cheaper option.
1 answer
1 answer