Scenario 9.5
Tom Bergman, owner and operator of the Earplug Superstore, is reviewing the costs associated with the store's best-selling hearing aid, the BZ15. The data available to Dr. Bergman concerning this device follow.
Demand = 25 units/week
Order cost = $3/order
Holding cost = $1.50/unit/year
The Earplug Superstore operates 52 weeks a year.
-Use the information in Scenario 9.5. If Tom decides to order at the economic order quantity, what is the sum of the annual ordering cost and holding cost?
A) less than or equal to $90
B) greater than $90 but less than or equal to $100
C) greater than $100 but less than or equal to $115
D) greater than $115

Question

Quizplus · Accepted Answer

To find the economic order quantity, we can use the formula:
EOQ = sqrt((2 x demand x order cost) / holding cost)
EOQ = sqrt((2 x 25 x $3) / $1.50) = 20
At EOQ, the ordering cost would be:
ordering cost = (demand / EOQ) x order cost = (25/20) x $3 = $3.75/week
And the holding cost would be:
holding cost = (EOQ / 2) x holding cost per unit = (20/2) x $1.50 = $15/week
So, the sum of annual ordering cost and holding cost is:
annual cost = (ordering cost + holding cost) x 52 weeks/year = ($3.75 + $15) x 52 = $962.50/year
Which is greater than $100 but less than or equal to $115. Therefore, the answer is C.

Scenario 9.5 Tom Bergman, Owner and Operator of the Earplug Superstore, Is