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Patriot Company predicts that it will use 360,000 gallons of material during the year. The material is expected to cost 5 per gallon. Patriot anticipates that it will cost 72 to place each order. The annual carrying cost is 4 per gallon. a. Determine the most economical order quantity by using the EOQ formula. b. Determine the total cost of ordering and carrying at the EOQ point.

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Question

Patriot Company predicts that it will use 360,000 gallons of material during the year. The material is expected to cost 5 per gallon. Patriot anticipates that it will cost 72 to place each order. The annual carrying cost is 4 per gallon. a. Determine the most economical order quantity by using the EOQ formula. b. Determine the total cost of ordering and carrying at the EOQ point.

Uploaded by

Noman Khosa
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Question:

Patriot Company predicts that it will use 360,000 gallons of material during the year. The material is
expected to cost 5 per gallon. Patriot anticipates that it will cost 72 to place each order.

The annual carrying cost is 4 per gallon.

a. Determine the most economical order quantity by using the EOQ formula.
b. Determine the total cost of ordering and carrying at the EOQ point.

Solution:

a)

2 × 𝑂𝑟𝑑𝑒𝑟 𝑐𝑜𝑠𝑡 × 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑚𝑎𝑛𝑑


𝐸𝑂𝑄 = √
𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

2 × 72 × 360,000
𝐸𝑂𝑄 = √
4

51,840,000
𝐸𝑂𝑄 = √
4

𝐸𝑂𝑄 = √12,960,000

𝐸𝑂𝑄 = 3600 𝐺𝑎𝑙𝑙𝑜𝑛𝑠

b)
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑚𝑎𝑛𝑑 360,000
𝐴𝑛𝑛𝑢𝑎𝑙 𝑂𝑟𝑑𝑒𝑟 = = = 100 𝑂𝑟𝑑𝑒𝑟
𝑃𝑒𝑟 𝑂𝑟𝑑𝑒𝑟 3600

Ordering Cost: (100 orders ×72 per order)

𝐎𝐫𝐝𝐞𝐫𝐢𝐧𝐠 𝐂𝐨𝐬𝐭 = 𝟏𝟎𝟎 𝐨𝐫𝐝𝐞𝐫𝐬 × 𝟕𝟐 𝐩𝐞𝐫 𝐨𝐫𝐝𝐞𝐫 = 𝟕𝟐𝟎𝟎

𝟏
𝑪𝒂𝒓𝒓𝒚𝒊𝒏𝒈 𝑪𝒐𝒔𝒕 = {( × 𝑬𝑶𝑸) + 𝑺𝒂𝒇𝒆𝒕𝒚 𝑺𝒕𝒐𝒄𝒌} × 𝑪𝒂𝒓𝒓𝒚𝒊𝒏𝒈 𝒄𝒐𝒔𝒕 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕
𝟐

𝟏
𝑪𝒂𝒓𝒓𝒚𝒊𝒏𝒈 𝑪𝒐𝒔𝒕 = {( × 𝟑𝟔𝟎𝟎) + 𝟎} × 𝟒
𝟐

𝑪𝒂𝒓𝒓𝒚𝒊𝒏𝒈 𝑪𝒐𝒔𝒕 = (𝟏𝟖𝟎𝟎) × 𝟒 = 𝟕𝟐𝟎𝟎

𝑻𝒐𝒕𝒂𝒍 𝑶𝒓𝒅𝒆𝒓𝒊𝒏𝒈 & 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 = 7200 + 7200

𝑻𝒐𝒕𝒂𝒍 𝒐𝒓𝒅𝒆𝒓𝒊𝒏𝒈 & 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 = 14000

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