Customers at furniture store demand an average of 6,000 bookcases per year. Each time an order is placed, an ordering cost of $300 is incurred. The annual holding cost for a single desk is 25% of the $200 cost of a bookcase. Assume that the lead time to receive an order is one week. a) Each time an order is placed, how many bookcases should be ordered? b) What is the cycle time, T? c) How many orders should be placed each year? d) Determine the total annual costs of meeting the customers' demands for bookcases.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Customers at
furniture store demand an average of 6,000 bookcases per
year. Each time an order is placed, an ordering cost of $300 is incurred. The annual
holding cost for a single desk is 25% of the $200 cost of a bookcase. Assume that
the lead time to receive an order is one week.
a) Each time an order is placed, how many bookcases should be ordered?
b) What is the cycle time, T?
c) How many orders should be placed each year?
d) Determine the total annual costs of meeting the customers' demands for
bookcases.
Transcribed Image Text:Customers at furniture store demand an average of 6,000 bookcases per year. Each time an order is placed, an ordering cost of $300 is incurred. The annual holding cost for a single desk is 25% of the $200 cost of a bookcase. Assume that the lead time to receive an order is one week. a) Each time an order is placed, how many bookcases should be ordered? b) What is the cycle time, T? c) How many orders should be placed each year? d) Determine the total annual costs of meeting the customers' demands for bookcases.
Expert Solution
Step 1

The economic order quantity is the best order quantity for a corporation to purchase in order to reduce inventory costs such as holding charges, shortage costs, and order fees (EOQ).

The following is the EOQ formula:

EOQ = 2DSHwhere,D = Demand in unitsS = Order cost (per purchase order)H = Holding cost (per unit or per year)

 

Facts of the Question :

  • Average demand of bookcases per year = 6,000 = (D)
  • Cost of bookcase = $200
  • Ordering Cost = $300 = (S)
  • Annual holding cost for a single desk = 25% * $200 = $50 =(H)
  • Lead time = 1 week = 7 days = 168 minutes

 

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