Question

Mayer, Inc. predicts it will use 63,000 units of material during the year. The expected daily usage is 500 units, and there is an expected lead time of five days and the desired safety stock of 1,500 units. The material is expected to cost $5 per unit. Mayer anticipates it will cost $194.45 to place each order. The annual carrying cost is $.50 per unit. Required: Compute the order point. Determine the most economical order quantity by use of the EOQ formula (round to the nearest whole unit). Calculate the total cost of ordering and carrying at the EOQ point.

Answer 1

1	Order Point	(500*5)+1500
	Order Point	4,000
2	Most economical order quantity
	EOQ = under-root of { (2*A*O) / C }
	EOQ = under-root of { (2 * 63000 * 194.45) / 0.50 }
		(2*63000*194.45)/0.5
	EOQ = under-root of 49,001,400
	EOQ	SQRT((2*63000*194.45)/0.5)
	EOQ	7,000
3	Total cost of ordering and carrying at the EOQ point
	OC + CC = under-root of (2 * A * O * C)
	Total OC & CC = under-root of (2 * 63000 * 194.45 * 0.50)
	Total OC & CC	SQRT(2*63000*194.45*0.5)
	Total OC & CC	3,500
	Verification
	CC (1/2*7000*0.5)	1,750
	OC (63000/7000*194.45)	1,750
	Total OC & CC	3,500