Scenario 9.1
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 9.1.The purchasing manager decides that,in order to save purchasing time,orders for the XO-01 will be placed every three months,or four times per year.How much does this approach cost Talbot in total annual holding and ordering costs (instead of Talbot ordering using the EOQ quantity)?

Question

Quizplus · Accepted Answer

Using the EOQ formula for the XO-01 assembly,
EOQ = sqrt((2DS)/H)
where D = demand (8,000 units), S = order cost ($50), and H = holding cost per unit ($20).
EOQ = sqrt((2*8,000*50)/20) = 400 units per order

The number of orders placed in a year is calculated:
Number of orders = (Demand in units) / (Units per order)
Number of orders = 8,000 / 400 = 20 orders per year

Ordering 4 times a year means that the number of units per order is:
Units per order = (Demand in units) / (Number of orders per year)
Units per order = 8,000 / 4 = 2,000 units per order

Using this approach, Talbot incurs annual ordering costs of:
Annual ordering costs = (Number of orders per year) * (Order cost per order)
Annual ordering costs = 20 * 50 = $1,000

Talbot also incurs annual holding costs of:
Annual holding costs = (Units per order) / 2 * (Holding cost per unit)
Annual holding costs = 2,000 / 2 * 20 = $20,000

Total annual cost = Annual ordering costs + Annual holding costs
Total annual cost = $1,000 + $20,000 = $21,000

Therefore, the best choice is B, since the total annual cost of ordering 4 times per year is greater than $14,000 but less than or equal to $18,000, while the EOQ quantity would have resulted in a lower total cost of $10,000.

Scenario 9.1 The Talbot Company Uses Electrical Assemblies to Produce an Array