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Present Total Annual Stocking Costs

3.  The general manager of a local pool supply company wants to determine if he could save money if he used an EOQ ordering system, instead of the current rule of thumb approach.  He instructs Mr. Num Bercrunch, an inventory analyst, to conduct an analysis of one of the most popular pumps.  Mr. Bercrunch develops the following estimates from accounting information: D = 10,000 pumps per year;  the present quantity ordered is 400; C=\$10; H = \$0.40 per pump; and S = \$5.50 per order.

â??a.  Calculate the present total annual stocking costs.
â??b.  Calculate the EOQ.
â??c.  Calculate the total annual stocking costs using the EOQ.
â??d.  Calculate the savings or loss for this single item if the EOQ was used and extrapolate that savings/loss across the 1,000 other products the firm carries.  What should the firm do?

Solution Preview

Hello,

Number of orders = Annual demand / order quantity
Average inventory = Order quantity / 2
Total annual stocking cost = Ordering cost + Inventory carrying cost
Ordering cost = number of orders x ordering cost
Inventory carrying cost = Carrying cost per unit x average inventory

Current policy:
Order ...

Solution Summary

The solution shows calculations of EOQ , annual stocking costs,and saving if EOQ model is used.

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