Answer:
The total savings amount to $180- $178.8 =$1.11
Explanation:
To find the total savings, we will deduct the current inventory cost under the order size of 500 units from the total cost calculated using the EOQ.
EOQ represents the order size that minimizes both carrying and ordering costs.
Current total cost for the 500 unit order size
At present, total cost = Annual ordering cost + Annual holding cost
Annual ordering cost= (Demand/order size) × Cost per order
=(1000/500) × $40 = $80
Carrying cost = holding cost per unit per annum × order size/2
= 20% × $2 × (500/2)= $100
Total cost =80+ 100 = $180
Total cost using EOQ
EOQ computation proceeds as follows:
EOQ = (2× Co D)/Ch)^(1/2)
Where Co represents ordering cost, Ch is holding cost, and D signifies annual demand
EOQ = √(2× 40×1000/20%×2
Calculating this gives an EOQ of 447.21 units
Total inventory costs
Ordering cost = (1000/447.21)×40 = 89.4427191
Holding cost = (447.21/2) * 20% × 2= 89.4427191
Total cost =89.44 + 89.44 = 178.8
Total savings would then be calculated as follows: $180- $178.8 =$1.11456
