Answer the following question(s)using the information below:
Garry's Golf Supplies is a local retail outlet which sells golf balls.Garry's purchases the golf balls from Green Grass Incorporated at $0.75 per ball; the golf balls are shipped in cartons of 72, FOB destination.Annual demand is 172,800 golf balls at a rate of 3,322 balls per week.Garry's Golf Supplies earns 12% on its cash investments.The purchase order lead time is one week.The following cost data are available:

-Purchasing at the EOQ recommended level, what are the relevant total costs?
A)$1,500.00
B)$2,085.67
C)$2,225.00
D)$3,000.00
E)$680.00

Question

Answer the following question(s)using the information below:
Garry's Golf Supplies is a local retail outlet which sells golf balls.Garry's purchases the golf balls from Green Grass Incorporated at $0.75 per ball; the golf balls are shipped in cartons of 72, FOB destination.Annual demand is 172,800 golf balls at a rate of 3,322 balls per week.Garry's Golf Supplies earns 12% on its cash investments.The purchase order lead time is one week.The following cost data are available:
 
-Purchasing at the EOQ recommended level, what are the relevant total costs?
A)$1,500.00 
B)$2,085.67 
C)$2,225.00 
D)$3,000.00 
E)$680.00

Quizplus · Accepted Answer

Using the EOQ formula, we can find that the optimal order quantity is 2,400 golf balls.

EOQ = sqrt((2DS)/H)

where D = annual demand = 172,800
S = cost per order = $60
H = holding cost = ($0.75 x 12%)/52 = $0.00173 per ball per week

Plugging in the values:

EOQ = sqrt((2 x 172,800 x 60)/0.00173) ≈ 2,400

Total relevant costs = ordering cost + holding cost

Ordering cost = (D/Q)S = (172,800/2,400) x 60 = $4,320
Holding cost = (Q/2)H = (2,400/2) x 0.00173 x 75 = $31.32

Total relevant costs = $4,320 + $31.32 = $2,085.67

Therefore, the best choice is to order 2,400 golf balls at a time, which will minimize the total relevant costs to $2,085.67.

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