A produce distributor uses 783 packing crates a month, which it purchases at a cost of $11 each. The manager has assigned an annual carrying cost of 32 percent of the purchase price per crate. Ordering costs are $31. Currently the manager orders once a month.How much could the firm save annually in ordering and carrying costs by using the EOQ? (Round intermediate calculations and final answer to 2 decimal places. Omit the "$" sign in your response.)

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Zviko Zviko · Answer 1 · 2020-08-22T06:14:24+02:00

Answer:

Annual Savings will be ;

Ordering Cost = $2,993.88

Holding Cost = $661.78

Explanation:

First Calculate the Economic Order Quantity (EOQ)

EOQ = √ 2 × Annual Demand × Ordering Cost per Order / Holding Cost per unit

= √ ((2 × 783× 12 × $31) / ($11 × 32%))

= 407

Note : Currently the firm orders at 783 crates per month

Savings in Ordering Cost will be :

Savings = Ordering Cost at Current Quantity - Ordering Cost at EOQ

= (Total Demand / Current Quantity × Ordering Costs) - (Total Demand / Current Quantity × Ordering Costs)

= (9396/783 × $31) - (9396/407 × $31)

= $2,993.88

Savings in Holding Cost will be :

Savings = (Current Quantity - Economic Order Quantity) / 2 × Holding Cost per unit

= (783 - 407) / 2 × ($11 × 32%)

= $661.78