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14 April, 15:19

A gift shop sells 1000 boxes of scented candles a year. The ordering cost is $50 for scented candles, and holding cost is $10 per box per year. What is the minimum annual amount of these combined costs the gift shop could pay?

a. $100

b. $2000

c. $200

d. $1000

e. $1200

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Answers (1)
  1. 14 April, 15:24
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    d. $1000

    Explanation:

    Annual demand, D = 1000 boxes

    Ordering cost, Co = $50

    Holding cost = $10 per box per year

    Economic Order Quantity (EOQ) is calculated as;

    EOQ = SQRT [ (2 x D x Co) / H]

    where,

    D = Annual demand

    Co = Ordering cost

    H = Holding cost

    Putting the given values in the above formula, we get;

    EOQ = SQRT [ (2 x 1000 x 50) / 10]

    EOQ = 100 boxes

    Total ordering cost is calculated as;

    Total ordering cost = D/EOQ x Co

    Total ordering cost = (1000/100) x 50

    Total ordering cost = $500

    Total holding cost is calculated as;

    Total holding cost = EOQ/2 x H

    Total holding cost = (100/2) x 10 0

    Total holding cost = $500

    The minimum annual amount of these combined costs the gift shop could pay is;

    Minimum annual amount = Total ordering cost + Total holding cost

    = $500 + $500

    = $1,000

    Therefore, The minimum annual amount of these combined costs the gift shop could pay is $1,000.
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