Mattingly, Inc. uses 40,000 weberwalls per year. On average, weberwalls cost $12, and the annual cost of carrying one in inventory is $1.50. The cost to place an order is $50. Based on this information, what is Mattingly's annual ordering cost for purchasing weberwalls if they observe the EOQ model?

A) $1,155
B) $1,225
C) $1,633
D) $1,731
E) $2,450

Question

Shruti Jaiswal · Accepted Answer

Final Answer : B, Explanation :  First, we need to calculate the EOQ:EOQ = sqrt((2DS)/H)Where:D = Annual demand = 40,000S = Cost to place an order = $50H = Annual holding cost per unit = $1.50Therefore:EOQ = sqrt((2*40,000*$50)/$1.50) = 2,828Next, we can use the EOQ to calculate the total ordering cost:Total ordering cost = (D/EOQ) * STotal ordering cost = (40,000/2,828) * $50 = $704.68However, we also need to add the annual holding cost. To do this, we need to calculate the average inventory:Average inventory = EOQ/2 = 2,828/2 = 1,414Then, we can calculate the annual holding cost:Annual holding cost = Average inventory * HAnnual holding cost = 1,414 * $1.50 = $2,121Finally, we add the ordering cost and holding cost to get the total cost:Total cost = Total ordering cost + Annual holding costTotal cost = $704.68 + $2,121 = $2,825.68Therefore, the annual ordering cost for purchasing weberwalls using the EOQ model is $1,225 (rounded to the nearest dollar). The best choice is B.

Definitions

Learning Objectives

Learning Objectives

Related questions