Question

Henry Crouch's law office has traditionally ordered ink refills 55 units at a time. The firm estimates that carrying cost is 40% of the $11 unit cost and that annual demand is about 235 units per year. The assumptions of the basic EOQ model are thought to apply. For what value of ordering cost would its action be optimal? a) For what value of ordering cost would its action be optimal? Its action would be optimal given an ordering cost of $___________per order (round your response to two decimal places)

Answer 1

Answer:

Its action would be optimal given an ordering cost of $28.31 per order

Explanation:

According to the given data we have the following:

economic order quantity, EOQ= 55 units

annual demand, D=235

holding cost per one unit per year, H=40%×$11=$4.4

ordering cost, S=?

In order to calculate the ordering cost we would have to use the following formula:

EOQ=√(2×D×S)

                (H)

Hence, S=(EOQ)∧2×H

                     2×D

           S=(55)∧2×4.4

                   2×235

          S=13,310

                470

          S=$28.31

Its action would be optimal given an ordering cost of $28.31 per order

Answer 2

Its action would be optimal given an ordering cost of $28.32 per order.

a. Ordering cost

First step is to calculate the carrying cost

Carrying cost= 11x40%

Carrying cost=4.4

Second step is to calculate the ordering cost

Ordering cost=Order unit^2(Carrying cost)/2(Annual demand)

Ordering cost=55^2(4.4)/2(235)

Ordering cost=13,310/470

Ordering cost=$28.32

b. If the true ordering cost turns out to be much less than your answer to part​ (a). The impact on the​ firm's ordering​ policy is to reduce the order quantity.

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