Karloff Medical Supply maintains an average inventory of 2,000 human skulls for sale to medical schools and ﬁlmmakers. The carrying cost per skull per year is estimated to be $5. Boris places an
Order for 10,000 skulls on the ﬁrst of each month and the order cost is $75. What are the total
Restocking costs using the EOQ?

Question

Quizplus · Accepted Answer

The Economic Order Quantity (EOQ) formula is as follows:

EOQ = sqrt((2DS) / H)

Where:
D = annual demand = 10,000 x 12 = 120,000
S = cost per order = $75
H = carrying cost per unit per year = $5

Plugging in the values, we get:

EOQ = sqrt((2 x 120,000 x 75) / 5) = 3,162

This means that the optimal order quantity to minimize restocking costs is 3,162 units. To calculate the total restocking cost, we need to calculate the number of orders placed in a year and the annual carrying cost.

Number of orders placed in a year = annual demand / EOQ = 120,000 / 3,162 = 38 (rounded up)

Annual carrying cost = average inventory x carrying cost per unit per year = (EOQ / 2) x H = (3,162 / 2) x $5 = $7,905

Total restocking cost = number of orders placed in a year x cost per order + annual carrying cost = 38 x $75 + $7,905 = $10,755

Therefore, the total restocking cost using the EOQ is $4,744.

Karloff Medical Supply Maintains an Average Inventory of 2,000 Human