Michael's Mechanical sells 6,000 jettison machines annually

Finance Nov 24, 2020

Michael's Mechanical sells 6,000 jettison machines annually. Each machine costs Michael's $2000 to purchase, inventory carrying costs are 30% of the purchase price, and the cost of placing an order with its supplier is $120. (a) What is the EOQ? (b) What is the total inventory cost at the EOQ?

Expert Solution

EOQ=((2*annual qty*fixed cost per order)/annual holding cost per unit)^(1/2)

EOQ=((2*6000*120)/600)^(1/2)

EOQ = 48.99

Average inventory level = EOQ/2

Average inventory level = 600/2=300

Annual carrying cost = Avg inventory level*annual holding cost

Average carrying cost = 300*600

Average carrying cost = 180000

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