Advance Auto Parts has an annual demand of 2500 automotive c

Advance Auto Parts has an annual demand of 2,500 automotive components. The components are purchased from a supplier located ninety miles away. The holding cost per component per year is $1.50. The ordering cost per order is $18.75. The lead time is 2 days. The working days per year are 250. Given EOQ, what approximately would be the annual ordering cost?

Solution

EOQ = SQRT ((2*D*S)/H)

D = 2500

S = $18.75

H = $1.50

EOQ = SQRT ((2*2500*18.75/1.5) = SQRT(93750/1.5) = SQRT (62500) = 250 units

number of orders = annual demand/EOQ = 2500/250 = 10 orders

annual ordering cost = ordering cost per order*number of orders in a year

= 18.75*10 = $187.50