Scenario 9.3
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 Mr.Bergman concerning this device follow.
Demand = 25 units/week
Order cost = $3/order
Holding cos = $1.50/unit/year
The Earplug Superstore operates 52 weeks a year.
-Use the information in Scenario 9.3.If Tom decides to order at the economic order quantity,what is the sum of the annual ordering cost and holding cost?

Question

Quizplus · Accepted Answer

To find the economic order quantity (EOQ), we use the formula:

EOQ = √((2DS)/H)
where:
D = demand per week = 25 units
S = setup or ordering cost = $3/order
H = holding cost = $1.50/unit/year x (1 year/52 weeks) = $0.0288/unit/week (rounded to 4 decimal places)

EOQ = √((2 x 25 x 3)/0.0288) = 51.96 (rounded up to 52 units)

The total annual ordering cost is:

(25 units/week) x (52 weeks/year) ÷ (52 units/order) x ($3/order) = $75

The total annual holding cost is:

(52 units/2) x $1.50/unit/year = $39

So the sum of the annual ordering cost and holding cost is $75 + $39 = $114.

Therefore, the answer is (C) greater than $100 but less than or equal to $115.

The best choice for Tom Bergman would be to order at the EOQ of 52 units, as this minimizes the total annual cost of ordering and holding inventory.

Scenario 9.3 Tom Bergman,owner and Operator of the Earplug Superstore,is Reviewing the Reviewing