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Economic order quantity; ordering and carrying costsPerry Co. predicts it will use 25,000 units of material during theyear. The expected daily usage is 200 units, and there is anexpected lead time of five days and a desired safety stock of500 units. The material is expected to cost $5 per unit. Perry anticipates it will cost $50 to place each order. The annual carrying costis $.10 per unit. Similar toSelf-Study Problem 1LO5LO5LO1Chapter 2—Accounting for Materials 119Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.Required:1. Compute the order point.2. Determine the most economical order quantity by use of theEOQ formula.3. Calculate the total cost of ordering and carrying at the EOQpoint.

Question

Economic order quantity; ordering and carrying costs
Perry Co. predicts it will use 25,000 units of material during the
year. The expected daily usage is 200 units, and there is an
expected lead time of five days and a desired safety stock of
500 units. The material is expected to cost $5 per unit. Perry anticipates it will cost $50 to place each order. The annual carrying cost
is $.10 per unit. Similar to
Self-Study Problem 1
LO5
LO5
LO1
Chapter 2—Accounting for Materials 119
Copyright 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Required:
1. Compute the order point.
2. Determine the most economical order quantity by use of the
EOQ formula.
3. Calculate the total cost of ordering and carrying at the EOQ
point.

check_circleAnswer
Step 1

Calculation of Order point:

Formula for Calculating Order Point is,
Order Point Lead Time Demand
Safety Stock
(By putting the value of Lead Time Demand in above Formula from equation 1.)
Order Point Lead Time Demand Safety Stock
Order Point 1000 units + 500 units
Order Point 1500 units
Equation 1. Lead Time Demand Lead Timex Average Daily Usage
Lead Time Demand = 5 Days x 200 units
Lead Time Demand = 1000 units
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Formula for Calculating Order Point is, Order Point Lead Time Demand Safety Stock (By putting the value of Lead Time Demand in above Formula from equation 1.) Order Point Lead Time Demand Safety Stock Order Point 1000 units + 500 units Order Point 1500 units Equation 1. Lead Time Demand Lead Timex Average Daily Usage Lead Time Demand = 5 Days x 200 units Lead Time Demand = 1000 units

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Step 2

Formula for calculating Econo...

2 x A xO
EOQ
ЕOQ
C
Where,
Annual material used
A
O-Ordering cost (Cost to place each order)
C- Carrying Cost
EOQ- Economic Order quantity
By Putting the values in above Formula
2 x 25000 x 50
ЕOQ -
0.10
EOQ 25000000
EOQ 5000 units
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2 x A xO EOQ ЕOQ C Where, Annual material used A O-Ordering cost (Cost to place each order) C- Carrying Cost EOQ- Economic Order quantity By Putting the values in above Formula 2 x 25000 x 50 ЕOQ - 0.10 EOQ 25000000 EOQ 5000 units

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