Aberwald Corporation
Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying cost is equal to 20 percent of the purchase price. (Assume a 360-day year.)
-Refer to Aberwald Corporation.At the EOQ,what is Aberwald's cost of ordering and carrying inventory?

Question

Quizplus · Accepted Answer

EOQ formula: EOQ = sqrt((2DS)/H)

where D = annual demand, S = setup cost per order, H = holding cost per unit per year

D = 126,000
S = $200
H = 20% of $25 = $5

Substituting the values in the formula, we get:

EOQ = sqrt((2*126,000*$200)/$5) = 4,000

Total cost at EOQ can be calculated as:

Total cost = (DS/Q)S + (Q/2)H

where Q = EOQ

Total cost = (126,000/4,000)*$200 + (4,000/2)*$5 = $15,940

Therefore, Aberwald's cost of ordering and carrying inventory at the EOQ is $15,940. The best choice is C.

Aberwald Corporation Aberwald Corporation Expects to Order 126,000 Memory Chips for Inventory