Mattingly, Inc. uses 40,000 weberwalls per year. On average, weberwalls cost $12, and the annual cost of carrying one in inventory is $1.50. The cost to place an order is $50. Based on this information, what is Mattingly's annual ordering cost for purchasing weberwalls if they observe the EOQ model?
A)$1,155
B)$1,225
C)$1,633
D)$1,731
E)$2,450

Question

Quizplus · Accepted Answer

First, we need to calculate the EOQ:

EOQ = sqrt((2DS)/H)
Where:
D = Annual demand = 40,000
S = Cost to place an order = $50
H = Annual holding cost per unit = $1.50
Therefore:
EOQ = sqrt((2*40,000*$50)/$1.50) = 2,828

Next, we can use the EOQ to calculate the total ordering cost:

Total ordering cost = (D/EOQ) * S
Total ordering cost = (40,000/2,828) * $50 = $704.68

However, we also need to add the annual holding cost. To do this, we need to calculate the average inventory:

Average inventory = EOQ/2 = 2,828/2 = 1,414

Then, we can calculate the annual holding cost:

Annual holding cost = Average inventory * H
Annual holding cost = 1,414 * $1.50 = $2,121

Finally, we add the ordering cost and holding cost to get the total cost:

Total cost = Total ordering cost + Annual holding cost
Total cost = $704.68 + $2,121 = $2,825.68

Therefore, the annual ordering cost for purchasing weberwalls using the EOQ model is $1,225 (rounded to the nearest dollar). The best choice is B.