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Anne Beck recently took over a beauty supply store. Her predecessor always ordered shampoo in quantities of 100 units. Anne is reevaluating this policy. Based on her analysis, the cost to place each order is $35 and the holding cost is $8 per shampoo bottle per year. The annual demand for this product is 3000 bottles. Should Anne change the current order policy and, if so, how much can she save

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jepessoa

Answer:

Anne should increase the order quantity to 162 units, that way the company will save $154 per year.

Explanation:

economic order quantity (EOQ) = √(2SD / H)

  • order cost = $35
  • holding cost per unit = $8
  • annual demand = 3,000 units

EOQ = √[(2 x $35 x 3,000) / $8] = 162 units

total order cost per year = order costs x number of orders = $35 x (3,000 / 100) = $35 x 30 = 1,050

holding costs per year = average inventory x holding cost = 50 x $8 = $400

if EOQ is used:

order cost per year = (3,000 / 162) x $35 = $648

holding cost per year = 81 x $8 = $648

total savings = ($1,050 + $400) - ($648 + $648) = $154

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