fm28 8 - For example if the order size is 20 percent above...

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Mini Case: 28 - 8 e. What is Webster's added cost if it orders 400 units at a time rather than the EOQ quantity? What if it orders 600 per order? Answer: 400 units: TIC = CP(Q/2) + F(S/Q) = 0.2($200)(400/2) + $1,000(5,000/400) = $8,000 + $12,500 = $20,500. added cost = $20,500 - $20,000 = $500. 600 units : TIC = 0.2($200)(600/2) + $1,000(5,000/600) = $12,000 + $8,333 = $20,333. added cost = $20,333 - $20,000 = $333. Note the following points: At any order quantity other than EOQ = 500 units, total inventory costs are higher than they need be. The added cost of not ordering the EOQ amount is not large if the quantity ordered is close to the EOQ.
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Unformatted text preview: For example, if the order size is 20 percent above the EOQ (600 units), tic increases by only $333/$20,000 = 1.67%. • If the quantity ordered is less than the EOQ, then total carrying costs decrease, but total ordering costs increase. At q = 400 units, carrying costs fall by $2,000 per year, but ordering costs increase by $2,500. The net result is an increase in total costs. • If the quantity ordered is greater than the EOQ, then total carrying costs increase, but total ordering costs decrease. At Q = 600 units, carrying costs increase by $2,000, but ordering costs fall by only $1,667, so the net result is an increase in total costs....
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