Scenario 9.3
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 9.3. What is the total annual holding and ordering costs if Talbot orders using the EOQ quantity?
A) greater than $7,000
B) greater than $5,000 but less than or equal to $7,000
C) greater than $2,500 but less than or equal to $5,000
D) less than or equal to $2,500

Question

Quizplus · Accepted Answer

The Economic Order Quantity (EOQ) formula is $\sqrt{\frac{2DS}{H}}$, where $D$ is the demand, $S$ is the ordering cost, and $H$ is the holding cost per unit per year. Plugging in the values: $D = 8000$, $S = 50$, and $H = 20$, we get EOQ = $\sqrt{\frac{2*8000*50}{20}} = \sqrt{40000} = 200$. The total annual holding cost is $\frac{EOQ}{2} * H = \frac{200}{2} * 20 = 2000$. The total annual ordering cost is $\frac{D}{EOQ} * S = \frac{8000}{200} * 50 = 2000$. Adding both gives $4000, which is greater than $2,500 but less than or equal to $5,000.

Scenario 9.3 The Talbot Company Uses Electrical Assemblies to Produce an Array