Mungo Pet Supplies makes cat trees for several pet store chains. They order rolls of carpet (used to cover the trees) from a supplier. Mungo's management has decided to use an EOQ model. The annual demand for carpet is estimated to be 1,000 rolls. The purchase price per roll is $20 and estimated inventory carrying cost rate is 25%. The cost to place an order from the supplier is $30. What is the annual holding cost for the optimal order quantity?

Question

Quizplus · Accepted Answer

The EOQ formula is used to calculate the optimal order quantity, which minimizes the total inventory costs. The EOQ is given by the formula: EOQ = sqrt((2 * Demand * Order Cost) / Holding Cost Rate). Here, Demand = 1000 rolls, Order Cost = $30, and Holding Cost Rate = 25% of $20 = $5. The EOQ is approximately 109.54 rolls. The annual holding cost is calculated as (EOQ/2) * Holding Cost per unit, which is (109.54/2) * $5 = $273.86.

Mungo Pet Supplies Makes Cat Trees for Several Pet Store