Question

XYZ company buys in lots of 500 boxes which is a 3 month supply. The cost per box is Rupees 125 and the ordering cost is Rupees 150. The Inventory carrying cost is estimated at 20% of unit value. What is the total annual cost of the existing Inventory policy? How much money could be saved by employing the economic order Qty.? Any Explain plz​

Answer 1

Hi,

Answer:

Total annual cost of the exiting inventory = Rs. 6850

Savings done after employing the EOQ = Rs. 2962.5

Explanation:

Given data:

XYZ buys in lots of 500 boxes in every 3 months supply.

Cost of each box = Rs. 125

Cost of ordering per order = Rs. 150

Inventory carrying cost = 20% of unit value

To find: total annual cost of existing inventory policy and amount of money that could be saved by employing the economic order quantity.

Case 1: Before employing EOQ

It is a 3 months supply so, in a year there are 4 orders  

∴ Ordering cost for 4 orders in a year = 150*4 = Rs. 600

Now, the carrying cost of average inventory is given by  

= 500/2 * 20% * 125

= 250 * (20/100) * 125

= 6250

Therefore,  

The total annual cost of existing inventory policy = (Ordering cost for 4 orders in a year) + (carrying cost of average inventory)

=600 + 6250

= Rs. 6850

Case 2: After employing EOQ

The Economic Order formula, EOQ = $\sqrt{\frac{2*D*S}{H} }$

Where:

D = Annual demand per unit = 500 * 4 = 2000

S = ordering cost per purchse order = Rs. 150

H = Holding cost per unit = 20% * 125 = Rs. 25

∴ EOQ = √[(2*D*S)/H] = √[(2*2000*150)/25] = 154.91 units ≈ 155 units

No. of order that should be placed by the company XYZ as per the inventory policy = Annual demand / EOQ = 2000 / 155 = 12.90 == 13 orders approximately.

Therefore,  

Ordering cost for 13 orders @ 150 per order  

= 13 * 150  

= Rs.1950

Carrying cost of average inventory  

= 155/2 * 20% * 125

= 77.5 * 25

= Rs. 1937.5

So, the total annual cost  after employing EOQ

= Rs. 1950 + Rs. 1937.5  

= Rs. 3887.5

Hence, from case 1 & case 2 we can now calculate the amount of saving that colud be done by employing EOQ.

∴ Savings in the annual cost = Rs. 6850 – Rs. 3887.5 = Rs. 2962.5.

Hope this helps!!!!