Kandiann --
For EOQs, the question is:
When does the carrying cost equal the ordering cost? Any orders
HIGHER than that number mean that you're paying too much to finance
the inventory; any numbers LOWER than that means you're paying too
much for the order process.
1. What does it cost to carry a unit for a week?
$50 x 0.20 x 1/52 = $0.1924
2. How many units are sold each week?
7,200/52 = 139
3. How much is our weekly inventory carrying cost?
Well, it's actually a half a week's worth of carrying charges,
assuming that inventory is sold equally each day and we can reorder in
time for the next week's sales (both bad assumptions in the real
world):
($0.1924 x 139)/2 = $13.37
4. When are ordering charges and carrying costs equal?
$250 cost per order /$13.37 carrying cost per week = 18.69 weeks,
which is 18.69 * 139 units = 2,599 units
Now to your second question: what are total order-costs?
ORDER COSTS: You'll order 2.7822 times per year. (We'll accrue some
of the ordering costs to inventory on next year's balance sheet.)
Order costs = 2.7822 x $250 = $695.56
CARRYING COSTS: You're ordering every 18.69 weeks, so your average
balance is 9.345 weeks of inventory.
Carrying costs = 9.345 x $0.1924/unit/week x 139 units/week = $249.92
TOTAL = $945.48
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Note: your number for order costs plus carrying costs of inventory is
very high. If we were to assume ONE order each year, this is THE
WORST financial case:
ORDER COSTS: $250 (that part's easy)
CARRYING COSTS: you'll carry a half-year's inventory on average -- so it's
7,200 * 0.5 * 50 * 0.20 = $36,000
TOTAL = $36,250
If any part of this answer is unclear, please let me know via a
clarification request before rating the answer.
Best regards,
Omnivorous-GA |
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