Ottis, Inc., uses 640,000 plastic housing units each year in its production of paper shredders. The cost of placing an order is $30. The cost of holding one unit of inventory for one year is $15.00. Currently, Ottis places 160 orders of 4,000 plastic housing units per year. Required:
a. Compute the annual ordering cost.
b. Compute the annual carrying cost.
c. Compute the cost of Ottis's current inventory policy. Is this the minimum cost? Why or why not?
d. Compute the economic order quantity.
e. Comoute the ordering, carrying, and total costs for the EOQ.
f. How much money does the EOQ policy save the compnay over the policy of purchasing 4000 plastic housing units per order?

a. $4,800

b. $ 30,000

c. $34,800. No this is not the minimum. Both the ordering and holding costs are high.

d. 1,600 plastic housing units

e.  ordering = $12,000 , carrying = $12,000 , and total costs = $24,000

f. $10,000

Explanation:

At Current level,

annual ordering cost =  $30 × 160 orders

                                   =  $4,800

annual carrying cost  =  (4,000 / 2) × $15.00

                                   =  $ 30,000

Total Cost = $ 30,000 + $4,800

                 = $34,800

Economic order quantity is the optimum order size that will result in the total of ordering and holding costs being minimized.

Economic order quantity = √(2 × Annual Demand × Ordering Cost per order) / Holding Cost per unit

                                         = √(2 × 640,000 × $30) / $15.00

                                         = 1,600

At the EOQ,

annual ordering cost =  $30 × 640,00/1600 orders

                                   =  $12,000

annual carrying cost  =  (1,600 / 2) × $15.00

                                   =  $ 12,000

Total Cost = $ 12,000 + $ 12,000

                 = $24,800

Savings,

Saving = $34,800 - $24,800

           = $10,000

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