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A company purchases 5,000 units per quarter at even rate throughout the year.
Each order placed with the supplier incurs a delivery charge of $20.
The annual cost of holding one unit in inventory is $5.
What is the minimum total of the inventory costs (order costs plus holding costs) per year?
$2,000
$15,000
$8,000
$1,000what is the purchase cost and how to proceed to the answer?? please help
First you need to find the EOQ using the formula (which is given to you in the exam).
For the formula you need to know the demand per year (20,000) the order cost ($20) and the holding cost ($5). (You do not need to know the purchase cost – it is irrelevant.)
Then it is just using your calculator.Once you have calculated the EOQ then you can calculate the total inventory costs. It is the total of the order cost and the holding cost (total order cost = number of orders x cost each time; total holding cost = average inventory x cost per unit).
You will find my lecture on inventory control helpful.
Demand certainly is given – it says they buy 5,000 a quarter, so that is what they are demeaning!
(4 quarters in a year gives 4 x 5000 = 20000 per year
The answer in the test center given $2000.
There is 4 orders each order cost $20 so Order cost 4*$20=$80
The EOQ is 400 (2*20000*20/5)^
holding cost =(400/2)*5=$1000
Total Holding cost and ordering cost = $1080
So could you please advise what I miss here and how the answer is $2000?
How on earth can there be only 4 orders a year? 🙂
They are ordering 20,000 a year in total, and they are ordering 400 each time. I think that means that they will need to place 20,000 / 400 = 50 orders a year!
(You might find my lecture on inventory control useful)
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