The following data relates to the item of raw material:Unit cost of raw materialR30Usage per week50 unitsFixed ordering costR25 per orderVariable holding cost per annum, as a % of unit cost10%Number of weeks in a year48Required:Drag and drop the correct answer by filling in the missing information:Order quantity150 blank300480Number of orders blank blank blank blankAverage inventory blank blank blank blankANNUAL INVENTORY COSTSRRRROrdering costs blank blank blank blankHolding costs blank blank blank blankTOTAL blank blank blank blank EOQ level 400 280 225 150 75 110 650 100 600 305 845 200 10 8 5 38 450 32 290 140 300 16 240 625 220 125 12 720
Question
The following data relates to the item of raw material:Unit cost of raw materialR30Usage per week50 unitsFixed ordering costR25 per orderVariable holding cost per annum, as a % of unit cost10%Number of weeks in a year48Required:Drag and drop the correct answer by filling in the missing information:Order quantity150 blank300480Number of orders blank blank blank blankAverage inventory blank blank blank blankANNUAL INVENTORY COSTSRRRROrdering costs blank blank blank blankHolding costs blank blank blank blankTOTAL blank blank blank blank EOQ level 400 280 225 150 75 110 650 100 600 305 845 200 10 8 5 38 450 32 290 140 300 16 240 625 220 125 12 720
Solution
The Economic Order Quantity (EOQ) model is used to minimize the costs of ordering and holding inventory. The EOQ is the number of units that a company should add to inventory with each order to minimize the total costs of inventory—such as holding costs, order costs, and shortage costs. The EOQ model assumes that demand, ordering, and holding costs all remain constant.
- Calculate the EOQ:
EOQ = sqrt((2 * D * S) / H)
Where: D = Demand rate (Usage per week * Number of weeks in a year = 50 units * 48 weeks = 2400 units) S = Ordering cost (R25 per order) H = Holding cost (Unit cost * Holding cost % = R30 * 10% = R3 per unit per year)
EOQ = sqrt((2 * 2400 units * R25) / R3) = 200 units
- Calculate the number of orders:
Number of orders = D / EOQ = 2400 units / 200 units = 12 orders
- Calculate the average inventory:
Average inventory = EOQ / 2 = 200 units / 2 = 100 units
- Calculate the annual inventory costs:
Ordering costs = Number of orders * Ordering cost = 12 orders * R25 = R300 Holding costs = Average inventory * Holding cost = 100 units * R3 = R300 Total costs = Ordering costs + Holding costs = R300 + R300 = R600
So, the answers are:
Order quantity: 200 Number of orders: 12 Average inventory: 100 ANNUAL INVENTORY COSTS: Ordering costs: R300 Holding costs: R300 TOTAL: R600 EOQ level: 200
Similar Questions
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