Custom Computers, Inc. assembles custom home computer systems. The heat sinks needed are bought for $14 each and are ordered in quantities of 1200 units. Annual demand is 6200 heat sinks, the annual inventory holding cost rate is $2 per unit, and the cost to place an order is estimated to be $60. Calculate the following:

A) Economic order quantity=

B) Average inventory level=

C) The number of orders placed per year=

D) The total annual inventory holding cost=

E) The total annual ordering cost=

F) The total annual cost=

EOQ = 609.91 units

Average inventory = 600 units

Number of orders = 5.2 times

Annual inventory holding cost = $1,200

Annual ordering cost = $312

Total cost = $88,312

Explanation:

EOQ = √ (2 * Co * D) / Ch

EOQ=?, Co-60, Ch - 2, D - 6200

EOQ = √ (2 * 60 * 6200/2)

EOQ = 609.9180273

Average inventory = minimum level + EOQ/2

= 1200 / 2 = 600 units

Number of orders = Annual demand / order quantity

= 6,200/1200 = 5.166

Number of orders = 5.2 times

Annual inventory holding cost = Average inventory * holding cost per unit

=600 * $2 = $1,200

Annual ordering cost = No of orders * ordering cost per order

= 5.2 times * 2 = $312

Annual inventory cost = Purchase cost + Ordering cost + Holding cost

Purchase cost=Annual demand * unit price 14 * 6200 = 86,800

Total cost = 86,800 + $1,200 + $312

=88312