Answered: Sensitivity of E0Q to changes in…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter18: The Management Of Accounts Receivable And Inventories

Section: Chapter Questions

Problem 17P

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Question

Suppose the relevant carrying cost per unit per year was $20 and the relevant ordering cost per purchase order was $200. Suppose further that Alpha calculates EOQ after incorrectly estimating relevant carrying cost per unit per year to be $10 and relevant ordering cost per purchase order to be $400. Calculate the actual annual relevant total costs of Alpha’s EOQ decision. Compare this cost to the annual relevant total costs that Alpha would have incurred if it had correctly estimated the relevant carrying cost per unit per year of $20 and the relevant ordering cost per purchase order of $200 Calculate and comment on the cost of the prediction error.

Sensitivity of E0Q to changes in relevant ordering and carrying costs, cost of prediction error.
Alpha Company's annual demand for its only product, XT-590, is 10,000 units. Alpha is currently analyzing
possible combinations of relevant carrying cost per unit per year and relevant ordering cost per purchase
order, depending on the company's choice of supplier and average levels of inventory. This table presents
three possible combinations of carrying and ordering costs.
Relevant Carrying Cost per Unit per Year Relevant Ordering Cost per Purchase Order
$10
$400
$20
$200
S40
$100

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