Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
16th Edition
ISBN: 9780134475585
Author: Srikant M. Datar, Madhav V. Rajan
Publisher: PEARSON
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Textbook Question
Chapter 20, Problem 20.25E
Sensitivity of EOQ 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 |
$40 | $100 |
- 1. For each of the relevant ordering and carrying-cost alternatives, determine (a) EOQ and (b) annual relevant total costs.
Required
- 2. How does your answer to requirement 1 give insight into the impact of changes in relevant ordering and carrying costs on EOQ and annual relevant total costs? Explain briefly.
- 3. 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 that you have already calculated in requirement 1. Calculate and comment on the cost of the prediction error.
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1. Calculate Economic Order Quantity (EOQ), number of orders, annual ordering costs, annual carrying costs
and total inventory costs from the following: Annual consumption: 6000 units ; Carrying cost per unit: RO 2
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2. Find out the EOQ, Annual ordering cost and annual holding cost from the following information. The demand is 19500 units per year, holding cost is RO 4 per unit for a year and ordering cost is RO 25 order.
3. Find out the ordering cost from the following information, Annual demand is 240 units, holding cost RO 4 per unit for a year and EOQ is 60 units.
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5. Alexander pump LLC uses about 75000 valves per year and the usage is fairly constant at 6250 units per month. The valve…
1. Calculate Economic Order Quantity (EOQ), number of orders, annual ordering costs, annual carrying
costs and total inventory costs from the following:
Annual consumption: 6000 units
Carrying cost per unit: RO 2
Cost of placing one Order: RO 60
2. Find out the EOQ, Annual ordering cost and annual holding cost from the following information. The
demand is 19500 units per year, holding cost is RO 4 per unit for a year and ordering cost is RO 25
order.
3. Find out the ordering cost from the following information, Annual demand is 240 units, holding cost RO
4 per unit for a year and EOQ is 60 units.
4. If the price of the material is RO 15 per unit and the annual consumption is 4000 units, the interest and
store keeping charges are 20% of the value and the cost of placing of an order and receiving the goods
is RO 60, how much material should be ordered at one time?
5. Alexander pump LLC uses about 75000 valves per year and the usage is fairly constant at 6250 units
per month. The valve…
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.
Chapter 20 Solutions
Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
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