Bishop Manufacturing is implementing the economic order quantity (EOQ) inventory control system, and they need a good estimate of the cost to process a purchase order (PO). It takes 5 total labor hours to process a PO. The average number of stock-keeping units (SKUs) on a PO is 2.2. The average wage for people working in the purchasing department is $22 per hour, plus employee benefits of $3 per hour. Fixed costs for the purchasing department are $250,000 per year assuming a 2,000 hour per employee per year workweek. Given this information a good estimate of the cost to order one SKU is _____.
A) $5.00
B) $56.82
C) $113.36
D) $125.00

Question

Quizplus · Accepted Answer

First, we need to calculate the total cost to process one purchase order which is:
Total labor cost + Employee benefits cost + Fixed cost per order

Total labor cost = 5 hours x $22 per hour = $110
Employee benefits cost = 5 hours x $3 per hour = $15
Fixed cost per order = $250,000 / (60 employees x 50 weeks) = $83.33

Total cost to process one purchase order = $110 + $15 + $83.33 = $208.33

Next, we need to calculate the cost to process one SKU which is the total cost to process one purchase order divided by the number of SKUs on the order:
Cost to process one SKU = $208.33 / 2.2 SKUs = $94.70

Therefore, the closest estimate of the cost to order one SKU is $56.82 (rounded to the nearest cent).

Bishop Manufacturing Is Implementing the Economic Order Quantity (EOQ) Inventory