Answer the following questions using the information below:
Short Grass Incorporated is a distributor of golf balls. Mahmoud's Golf Supplies is a local retail outlet which sells golf balls. Mahmoud's purchases the golf balls from Short Grass Incorporated at $0.75 per ball; the golf balls are shipped in cartons of 72. Short Grass Incorporated pays all incoming freight, and Mahmoud's Golf Supplies does not inspect the balls due to Short Grass' reputation for high quality. Annual demand is 155,520 golf balls at a rate of 2,991 balls per week. Mahmoud's Golf Supplies earns 12% on its cash investments. The purchase-order lead time is one week. The following cost data are available:
Relevant ordering costs per purchase order $125.00
Carrying costs per carton per year:
Relevant insurance, materials handling,
breakage, etc., per year $ 0.77
-Purchasing at the EOQ recommended level, what are the relevant total costs?
A) $989.37
B) $1,978.60
C) $1,500.00
D) $3,000.00

Question

Answer the following questions using the information below:
Short Grass Incorporated is a distributor of golf balls. Mahmoud's Golf Supplies is a local retail outlet which sells golf balls. Mahmoud's purchases the golf balls from Short Grass Incorporated at $0.75 per ball; the golf balls are shipped in cartons of 72. Short Grass Incorporated pays all incoming freight, and Mahmoud's Golf Supplies does not inspect the balls due to Short Grass' reputation for high quality. Annual demand is 155,520 golf balls at a rate of 2,991 balls per week. Mahmoud's Golf Supplies earns 12% on its cash investments. The purchase-order lead time is one week. The following cost data are available:
Relevant ordering costs per purchase order $125.00
Carrying costs per carton per year:
 Relevant insurance, materials handling,
 breakage, etc., per year $ 0.77
-Purchasing at the EOQ recommended level, what are the relevant total costs?
A) $989.37
B) $1,978.60
C) $1,500.00
D) $3,000.00

Quizplus · Accepted Answer

The Economic Order Quantity (EOQ) model is used to minimize the total cost of inventory, including ordering and holding costs. The formula for EOQ is $\sqrt{\frac{2DS}{H}}$, where $D$ is the annual demand, $S$ is the ordering cost per order, and $H$ is the holding cost per unit per year. Given:- $D = 155,520$ golf balls per year- $S = $125$ per order- $H = $0.77$ per carton per year (since there are 72 balls per carton, the holding cost per ball is $\frac{$0.77}{72}$)First, calculate the EOQ:$$EOQ = \sqrt{\frac{2DS}{H}}$$$$EOQ = \sqrt{\frac{2 \times 155,520 \times 125}{0.77/72}}$$$$EOQ = \sqrt{\frac{389,800,000}{0.01069444}}$$$$EOQ = \sqrt{36,448,979.59}$$$$EOQ \approx 6,037 \text{ balls}$$Since EOQ is in terms of balls, and there are 72 balls per carton, the EOQ in cartons is approximately $6,037 / 72 \approx 83.85$ cartons. For simplicity and practicality in ordering, we round to the nearest whole number of cartons, but for cost calculations, we'll use the exact figure.Next, calculate the total relevant costs, which include the ordering costs and the carrying costs.Ordering costs:$$Total \text{ Ordering Costs} = \frac{D}{EOQ} \times S$$$$Total \text{ Ordering Costs} = \frac{155,520}{6,037} \times 125$$$$Total \text{ Ordering Costs} = 25.75 \times 125$$$$Total \text{ Ordering Costs} = \$3,218.75$$Carrying costs:$$Total \text{ Carrying Costs} = \frac{EOQ}{2} \times \frac{H}{72}$$$$Total \text{ Carrying Costs} = \frac{6,037}{2} \times \frac{0.77}{72}$$$$Total \text{ Carrying Costs} = 3,018.5 \times 0.01069444$$$$Total \text{ Carrying Costs} = \$32.27$$The total relevant costs are the sum of the ordering costs and the carrying costs. However, the provided options and the calculations do not align with the standard EOQ model results, indicating a possible misunderstanding in the calculation process or an error in the provided options. Given the options and the typical approach to EOQ calculations, none of the answers directly match the expected outcome of a standard EOQ calculation. The correct approach involves calculating EOQ to minimize total costs, but the provided answer choices and the calculation steps lead to a discrepancy. Therefore, the correct answer based on standard EOQ calculations isn't directly listed, suggesting a reevaluation of the calculation or the answer choices might be necessary.

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