Explanation:
a. The computation of the economic order quantity is shown below:
[tex]= \sqrt{\frac{2\times \text{Annual demand}\times \text{Ordering cost}}{\text{Carrying cost}}}[/tex]
[tex]= \sqrt{\frac{2\times \text{\15,600}\times \text{\$400}}{\text{\$5}}}[/tex]
= 1,580 units
The carrying cost is
= $50 × 10%
= $5
b. The number of orders would be equal to
= Annual demand ÷ economic order quantity
= 15,600 ÷ 1,580
= 9.87 orders
Ordering cost = Number of orders × setup cost per order
= 9.87 orders × $400
= $3,949.37
c. The average inventory would equal to
= Economic order quantity ÷ 2
= 1,580 units ÷ 2
= 790 units
Carrying cost = average inventory × carrying cost per unit
= 790 units × $5
= $3,950
c. Now the total cost
= Setup cost + carrying cost
= $3,949.37 + $3,950
= $7,899.37
