Net Steels is a steel manufacturing company. It orders 180 metric tons of raw material per order. It was observed that the company often faces stockout. To tackle this issue, the company incorporated a fixed-quantity system (FQS) and collected the following data.
$\begin{array} { | l | l | }
\hline \text { Demand } & 11,000 \text { metric tons per year } \
\hline \text { Order Cost } & \$ 18,000 \text { per order } \
\hline \text { Item Cost } & \$ 36,000 \text { per year } \
\hline \text { Inventory-Holding Cost } & 20 \text { percent per year } \
\hline
\end{array}$
Using the data, Net Steels determined that the economic order quantity (EOQ) should be 235 metric tons. In this scenario, the annual amount that Net Steels can save by ordering as per the EOQ instead of its conventional order is:
A) less than $45,000.
B) more than $45,000 but less than or equal to $55,000.
C) more than $55,000 but less than or equal to $65,000.
D) more than $65,000.

Question

Net Steels is a steel manufacturing company. It orders 180 metric tons of raw material per order. It was observed that the company often faces stockout. To tackle this issue, the company incorporated a fixed-quantity system (FQS) and collected the following data.
$\begin{array} { | l | l | } 
\hline \text { Demand } & 11,000 \text { metric tons per year } \
\hline \text { Order Cost } & \$ 18,000 \text { per order } \
\hline \text { Item Cost } & \$ 36,000 \text { per year } \
\hline \text { Inventory-Holding Cost } & 20 \text { percent per year } \
\hline
\end{array}$
Using the data, Net Steels determined that the economic order quantity (EOQ) should be 235 metric tons. In this scenario, the annual amount that Net Steels can save by ordering as per the EOQ instead of its conventional order is:
A) less than $45,000.
B) more than $45,000 but less than or equal to $55,000.
C) more than $55,000 but less than or equal to $65,000.
D) more than $65,000.

Quizplus · Accepted Answer

To find the annual amount that Net Steels can save by ordering as per the EOQ instead of its conventional order, we need to calculate the total annual cost for both scenarios and find the difference.

Conventional order:

The company orders 180 metric tons per order, and the total number of orders it places in a year is:

Number of orders = Demand / Quantity per order = 11,000 / 180 = 61.11 ≈ 62

The order cost per order is $18,000, so the total ordering cost for the year is:

Ordering cost = Number of orders × Order cost per order = 62 × $18,000 = $1,116,000

The company orders 62 times in a year, so the average inventory level is half of the order quantity, i.e., 180/2 = 90 metric tons. The inventory-holding cost per year is 20% of the item cost, which is $36,000. So, the total inventory-holding cost for the year is:

Inventory-holding cost = Average inventory level × Inventory-holding cost per unit per year = 90 × $36,000 × 20% = $648,000

The total annual cost for the conventional order scenario is:

Total cost = Ordering cost + Inventory-holding cost = $1,116,000 + $648,000 = $1,764,000

EOQ order:

The economic order quantity (EOQ) is 235 metric tons, so the number of orders placed in a year is:

Number of orders = Demand / Quantity per order = 11,000 / 235 = 46.81 ≈ 47

The order cost per order is $18,000, so the total ordering cost for the year is:

Ordering cost = Number of orders × Order cost per order = 47 × $18,000 = $846,000

The company orders 47 times in a year, so the average inventory level is half of the order quantity, i.e., 235/2 = 117.5 metric tons. The inventory-holding cost per year is 20% of the item cost, which is $36,000. So, the total inventory-holding cost for the year is:

Inventory-holding cost = Average inventory level × Inventory-holding cost per unit per year = 117.5 × $36,000 × 20% = $846,000

The total annual cost for the EOQ scenario is:

Total cost = Ordering cost + Inventory-holding cost = $846,000 + $846,000 = $1,692,000

The annual savings by ordering as per EOQ instead of the conventional order is:

Savings = Total cost for Conventional order - Total cost for EOQ order = $1,764,000 - $1,692,000 = $72,000

Therefore, the answer is C) more than $55,000 but less than or equal to $65,000.

Net Steels Is a Steel Manufacturing Company Using the Data, Net Steels Determined That the Economic Order