# Calculating the EOQ and various inventory costs

Southeast Hospital currently buys surgical gloves in lots of 1,500 boxes once every four months. Under this ordering policy, demand for gloves will be completely satisfied with no surplus and no shortage. The carrying cost per box is $15.00 per box per year, which is equivalent to 10% of cost, and the ordering cost is $150 per order.

1. What is the cost of one box of gloves?

2. Under the current ordering policy (i.e., 1,500 boxes every four months), what is the annual total inventory holding cost?

3. Under the current ordering policy, what is the annual total ordering cost?

4. Under the current ordering policy, what is the annual total product cost?

5. What is the economic order quantity?

6. At the economic order quantity level, how many times will orders be placed?

7. At the economic order quantity level, what is the time between orders?

8. At the economic order quantity level, what will be the annual total ordering cost?

9. At the economic order quantity level, what will annual total inventory holding cost?

10. A. Suppose that to order at the economic order quantity level, Southeast Hospital will have to pay $1.00 more per box. Should Southeast Hospital order at the economic order quantity? Justify your answer.

B. What if the price of the box was increased by $5.00 per box (instead of $1.00)? Should Southeast Hospital order at the economic order quantity? Justify your answer.

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#### Solution Preview

1. What is the cost of one box of gloves?

Cost of one box=Carrying cost per unit/10%=15/10%=$150

2. Under the current ordering policy (i.e., 1,500 boxes every four months), what is the annual total inventory holding cost?

Average inventory=order quantity/2=1500/2=750

Carrying cost per unit=Ch=$15

Annual holding cost=Average inventory*Ch=750*15=$11,250

3. Under the current ordering policy, what is the annual total ordering cost?

Number of orders placed in year=3 (one in 4 months)

Ordering cost per order=Co=$150

Annual ordering cost=Number of orders placed in a year*ordering cost=3*150=$450

4. Under the current ...

#### Solution Summary

Solution describes the steps to calculate inventory costs and EOQ in the given case.

Calculating EOQ and inventory costs

The president of the wholesale distributor has recently heard about the EOQ model and is interested in learning whether or not using this model would allow the company to reduce its annual costs by optimizing the number of orders placed each year and the number of toilets purchased in each order. The estimated annual demand for the toilets is 4,475 units. The estimated average demand per day is 15 units. The purchase cost from the toilet manufacturer is $125.00 per unit. The lead time for a new order is 4 days. The ordering cost is $110.00 per order. The average holding cost per unit per year is $1.85. The distributor has traditionally ordered 250 units each time they placed an order.

1. What is the economic order quantity (EOQ) that will minimize inventory costs?

2. What is the average number of units in inventory based upon ordering using the EOQ?

3. What is the average dollar value of inventory based upon ordering using the EOQ?

4. What is the total annual cost (Purchase Cost + Ordering Cost + Holding Cost) based upon using the EOQ?

5. What is the optimal reorder point based upon using the EOQ?

6. How many orders per year will be necessary based upon using the EOQ?