The Operations Manager for Shadyside Savings & Loan orders cash from her home office for her very popular "BIG BUCKS" automated teller machine,which only dispenses $100 bills.She estimates that this machine dispenses an average of 12,500 bills per month,and that holding a bill in inventory costs 10 percent of its value annually.She knows that each order for these bills costs $300 for clerical and armoured car delivery costs,and that order lead time is six days. If she were to order 6,000 bills at a time,what would be the average monthly total costs,EXCLUDING the value of the bills?
A)$625
B)$1,250
C)$2,500
D)$3,125
E)$5,000

Question

Quizplus · Accepted Answer

The average monthly total costs, excluding the value of the bills, can be calculated using the Economic Order Quantity (EOQ) model and the Total Cost formula, which includes the ordering costs and holding costs. Given the data:- Demand (D) = 12,500 bills per month- Order cost (S) = $300 per order- Holding cost per bill per year (H) = 10% of $100 = $10 per bill per year- Holding cost per bill per month (H') = $10 / 12 = $0.833 per bill per month- Order quantity (Q) = 6,000 billsOrdering costs per month = (D/Q) * S = (12,500 / 6,000) * $300Holding costs per month = (Q/2) * H' = (6,000 / 2) * $0.833Calculating these:Ordering costs per month = (12,500 / 6,000) * $300 ≈ $625Holding costs per month = (6,000 / 2) * $0.833 ≈ $2,500Total costs per month = Ordering costs + Holding costs ≈ $625 + $2,500 = $3,125

The Operations Manager for Shadyside Savings & Loan Orders Cash