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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: 1. Compute the economic order quantity. 2. Compute the ordering, carrying, and total costs for the EOQ. 3. How much money does using the EOQ policy save the company over the policy of purchasing 4,000 plastic housing units per order?

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Chapter
Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 20, Problem 7E
Textbook Problem
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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:

  1. 1. Compute the economic order quantity.
  2. 2. Compute the ordering, carrying, and total costs for the EOQ.
  3. 3. How much money does using the EOQ policy save the company over the policy of purchasing 4,000 plastic housing units per order?

1.

To determine

Compute the economic order quantity of Company I.

Explanation of Solution

Economic order quantity (EOQ): Economic order quantity is ideal order quantity that the company should purchase the inventory with the ideal level. The economic order quantity (EOQ) approach assumes that some inventory must be held for future production. The main objective of the EOQ is to balance the ordering costs against the holding costs of inventory.

Compute the economic order quantity of Company I as follows:

Economic order quantity = 2×Annual demand (D)×Cost per order (P)</

2.

To determine

Compute the ordering cost, the carrying cost and total cost for EOQ of Company I.

3.

To determine

Calculate the amount that is saved by the company over the purchase of policy.

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Chapter 20 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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