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
Answers
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 =
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!!!!