1/19/22, 7:23 PM [Solved] George Company buys 500 boxes of items X-100 every two months.
X-100 every two months. Order costs are P380 per order; carrying costs are P1 per unit and vary direc... | Course Hero
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George Company buys 500 boxes of items X-100 every two months....
George Company buys 500 boxes of items
X-100 every two months. Order costs are P380 per order; carrying costs are P1 per unit and vary directly
with inventory investment. Currently, the company purchases the item for P5 each.
Required:
1. Determine the total ordering and carrying costs under current policy.
2. Determine the economic order quantity and the related ordering and carrying costs.
3. What is the order optimal size if the supplier offers a 5% discount for orders of 3,000 units?
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Answer & Explanation Solved by verified expert 숨
1) Total Ordering Cost = P2280
Total Carrying Cost = P250
2) EOQ = 1510 units approx.
Total Ordering Cost = P755
Total Carrying Cost = P755
Note - Amounts may differ a little bit because of approximation.
3) Total Cost when offer is accepted (5% discount on 3000 units) (i.e. P16130) is less than total cost under EOQ policy (i.e. P16510).
Order Optimal Size = 3000 units
Step-by-step explanation
1) Total Ordering Cost = No. of Order per year * Order Cost per Order
= 6 orders * P380
= P2280
Working Note - Under Current Policy orders are placed in every two months means 6 orders (12 months / 2 months) are placed in a
year
Total Carrying Cost = Average Inventory * Inventory carrying cost per unit
= 250 units * P1
= P250
Note - Average Inventory = Ordering Quantity / 2
= 500 units / 2
= 250 units
2) EOQ (Economic Order Quantity) = [(2 * Annual Demand * Ordering cost per order) / Carrying Cost per unit]1/2
= [(2 * 3000 units * P380) / P1]1/2
= 1510 units approx.
Working Note - Annual Demand = Ordering Quantity under current policy * No. of order per year
https://www.coursehero.com/tutors-problems/Accounting/20869009-George-Company-buys-500-boxes-of-items-X-100-every-two-months-Order-c/?justUnlocked=1 1/4
1/19/22, 7:23 PM [Solved] George Company buys 500 boxes of items X-100 every two months. Order costs are P380 per order; carrying costs are P1 per unit and vary direc... | Course Hero
= 500 units * 6 orders per year
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= 3000 units 숿
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Total Ordering Cost (EOQ quantity) = No. of orders per year * Order cost per order
= 1.98675 order per year * P380
= P755 approx.
Working Note - No. of orders per year = Annual demand / EOQ
= 3000 units / 1510 units
= 1.98675 orders per year
Total Carrying Cost (EOQ quantity) = Average Inventory * Carrying cost per unit
= 755 units * P1
= P755
Working Note- Average Inventory = EOQ / 2
= 1510 units / 2
= 755 units
3) Total Cost = Cost of material + Ordering Cost + Carrying Cost
If EOQ policy is adopted
Total Cost = P15000 + P755 + P755
= P16510
Working Note - Cost of Material = Annual Demand * Per unit price
= 3000 units * P5
= P15000
Ordering and Carrying Cost are taken from part 2 of the question.
If Supplier's offer is accepted (5% discount on ordering 3000 units)
Cost of Material = Annual Demand * (Per unit price - Discount)
= 3000 units * (P5 - 5%*P5)
= P14250
Annual Demand is 3000 units and order quantity of offer is also 3000 units means there is only one order in the year
Therefore, Ordering Cost = No. of orders per year * Order cost per order
= 1 * P380
= P380
Carrying Cost = Average Inventory * Carrying cost per unit
= 1500 units * P1
= P1500
Working Note- Average Inventory = Quantity Ordered / 2
= 3000 units / 2
= 1500 units
Therefore, Total Cost = Cost of material + Ordering Cost + Carrying Cost
https://www.coursehero.com/tutors-problems/Accounting/20869009-George-Company-buys-500-boxes-of-items-X-100-every-two-months-Order-c/?justUnlocked=1 2/4
1/19/22, 7:23 PM [Solved] George Company buys 500 boxes of items X-100 every two months. Order costs are P380 per order; carrying costs are P1 per unit and vary direc... | Course Hero
= P14250 + P380 + P1500
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= P16130 숿
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As you can see Total Cost when offer is accepted (5% discount on 3000 units) (i.e. P16130) is less than total cost under EOQ policy
(i.e. P16510).
Therefore, Optimal Size would be 3000 units.
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1/19/22, 7:23 PM [Solved] George Company buys 500 boxes of items X-100 every two months. Order costs are P380 per order; carrying costs are P1 per unit and vary direc... | Course Hero
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