Additional average annual cost of holding and setup sustained from the use of the wrong costs. Introduction: Economic order quantity refers to the technique used to determine the volume and flow of order required to fulfill a given level of demand while minimizing per order cost.Such a tool is used by the organization to handle andmanage operations and logistics operations.

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Chapter 4, Problem 36AP

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To determine: Additional average annual cost of holding and setup sustained from the use of the wrong costs.

Introduction: Economic order quantity refers to the technique used to determine the volume and flow of order required to fulfill a given level of demand while minimizing per order cost.Such a tool is used by the organization to handle andmanage operations and logistics operations.

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36. The president of Value Filters became very enthusiastic about using EOQS to plan the sizes of her production runs, and instituted lot sizing based on EOQ values before she could properly estimate costs. For one particular filter line, which had an annual de- mand of 1,800 units per year and which was valued at $2.40 per unit, she assumed a holding cost based on a 30 percent annual interest rate and a setup cost of $100. Some time later, after the cost accounting department had time to perform an analysis, it found that the appropriate value of the interest rate was closer to 20 percent and the setup cost was about $40. What was the additional average annual cost of holding and setup incurred from the use of the wrong costs?

Buckley Enterprise sells a product that cost $450 per unit and has a monthly demand of 5,000 units. The annual holding cost per unit is calculated as 5% of the unit purchase price. It costs the business $75 to place a single order. Currently the business places 12 orders each year. i) What is the total stock administrative cost of Buckley’s current inventory policy? ii) Is this the entity’s cost minimizing solution for this product each year? Explain.

44. The Kirei-Hana Japanese Steak House in San Francisco consumes 3,000 pounds of sirloin steak each month. Yama Hirai, the new restaurant manager, recently completed an MBA degree. He learned that the steak was replenished using an EOQ value of 2,000 pounds. The EOQ value was computed assuming an interest rate of 36 percent per year. Assume that the current cost of the sirloin steak to the steak house is $4 per pound. a. What is the setup cost used in determining the EOQ value? Mr. Hirai received an offer from a meat wholesaler in which a discount of 5 percent would be given if the steak house purchased the steak in quantities of 3,000 pounds or more. b. Should Mr. Hirai accept the offer from the wholesaler? If so, how much can be saved? c. Because of Mr. Hirai's language problems, he apparently misunderstood the offer. In fact, the 5 percent discount is applied only to the amounts ordered over 3,000 pounds. Should this offer be accepted, and if so, how much is now saved?