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The bathroom section of a large department store sells 18,233 specialty bath towels per year. The unit purchase cost of a towel from the store’ supplier is $2.40 per towel. The cost of placing an order to the supplier is $14.00 per order. The holding cost is $0.60 per towel per year. Assume that the Economic Order Quantity (EOQ) Model is appropriate here, and that EOQ = 922.43.
a. What is the total annual setup (i.e., order) cost?

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Answer:

$280.00

Explanation:

An EOQ of 922.43 means that 922.43 bath towels must be ordered per each individual order. If the company sells 18,233 per year, the total number of orders is:

[tex]n= \frac{18,233}{922.43}=19.77\ orders[/tex]

Rounding up to the next whole order, 20 orders are placed during the year.

The setup cost is given by multiplying the cost per order ($14.00) by the number of orders:

[tex]S = 20*\$14.00\\S=\$280.00[/tex]

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