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. 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)?
A) greater than $18,000
B) greater than $14,000 but less than or equal to $18,000
C) greater than $10,000 but less than or equal to $14,000
D) less than or equal to $10,000

Question

Quizplus · Accepted Answer

First, calculate the quantity ordered each time: 8,000 units/year / 4 orders/year = 2,000 units/order. The average inventory (since inventory depletes linearly to zero before the next order arrives) is 2,000 / 2 = 1,000 units. The annual holding cost is 1,000 units * $20/unit = $20,000. The annual ordering cost is 4 orders/year * $50/order = $200. The total annual cost is $20,000 + $200 = $20,200, which is greater than $14,000 but less than or equal to $18,000.

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