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    EOQ and relevant total costs

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    Stereo Goods is a distributor of videotapes. Video Mart is a local retail outlet which sells blank and recorded videos. Video mart purchases tapes from Stereo Goods at $5 per tape; tapes are shipped in packages of 25. Stereo Goods pays all incoming freight, and Video Mart does not inspect the tapes due to Stereo Good's reputation for high quality. Annual demand is 104,000 tapes at a rate of 2,000 tapes per week. Video Mart earns 15% on its cash investments. The purchse-order lead time is one week. The following cost data are available:
    Relevant ordering costs per purchase order - $94.50
    Carrying costs per package per year:
    Revelant insurance, materials handling, breakage,etc., per year - $3.50

    1. What is the economic order quantity?
    2. What are the relevant total costs?
    3. How many deliveries will be made during each time period?

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    Solution Preview

    Here calculation are done for packages.
    Annual demand = 104,000 in units
    Annual demand, D = 104,000/25 = 4160 in packages
    Ordering cost, S = $94.50
    Cost per tape, C = $5
    Other inventory carrying cost = $3.50 per year per package
    Inventory carrying rate (opportunity cost), i = 15% ...

    Solution Summary

    Solution contains calculation of EOQ, relevant total costsand number of deliveries made during each time period.