Solution:
a. Economic order quantity (EOQ) = √2AO/ C
Here A = annual demand or production = 40,000 boxes
O = Order cost = $100
C = Carrying costs =$2 per box
thus, EOQ = √2×40,000×$100/ $2 = 2,000 boxes
b. Optimal number of orders to be placed = 40,000/2,000= 20
C. Total inventory cost associated with EOQ = √2AOC
= √2×40,000×$100×$2 = $4,000
d. Reorder Point = (Average daily usage × Lead time ) + safety stock = {(40,000/200)×2} + 500 = 900 units
e. Evaluation of cash discount offer :
Total cost at Order size of 3,000 boxes = C + O - cash discount =(3,000/2)×$2 + (40,000/3,000)×$100 - 3,000×0.02
= 1,500 + (13orders×$100) - 60 = $4,240
The Eathel Company should not increase its order size since total cost at EOQ level is lower than it would be at new order size.
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