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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.

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.

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