Scenario 9.3
The Talbot Company uses electrical assemblies to produce an array of small appliances. One of its high cost / high volume assemblies, the XO-01, has an estimated annual demand of 8,000 units. Talbot estimates the cost to place an order is $50, and the holding cost for each assembly is $20 per year. The company operates 250 days per year.
-Use the information in Scenario 9.3. What is the annual ordering cost if Talbot orders using the EOQ quantity?
A) less than or equal to $1,000
B) greater than $1,000 but less than or equal to $2,500
C) greater than $2,500 but less than or equal to $4,000
D) greater than $4,000

Question

Quizplus · Accepted Answer

The Economic Order Quantity (EOQ) formula is $\sqrt{\frac{2DS}{H}}$, where $D$ is the demand, $S$ is the ordering cost, and $H$ is the holding cost. Plugging in the values: $EOQ = \sqrt{\frac{2*8000*50}{20}} = \sqrt{40000} = 200$. The annual ordering cost is then calculated as $\frac{D}{EOQ} * S = \frac{8000}{200} * 50 = 40 * 50 = 2000$, which falls into the range of greater than $1,000 but less than or equal to $2,500.

Scenario 9.3 The Talbot Company Uses Electrical Assemblies to Produce an Array