# Accounting

## Accounting

﻿Formula to determine the optimum amount of inventory to order:

Nowlin Pipe & Steel has projected sales of 72,000 pipes this year, an ordering cost of \$6 per order, and carrying costs of \$2.40 per pipe.
a. What is the economic ordering quantity?
b. How many orders will be placed during the year?
c. What will the average inventory be?
d. Assume an additional 30 units of inventory will be required as safety stock. What will the new average inventory be?
a.
b. 72,000 units/600 units = 120 orders c. EOQ/2 = 600/2 = 300 units (average inventory)
d. Average Inventory + Safety Stock = 300 + 50 = 350
12. Howe Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Howe anticipates sales of 126,000 units per year, an ordering cost of \$4 per order, and carrying costs of \$1.008 per unit.
a. What is the economic ordering quantity?
b. How many orders will be placed during the year?
c. What will the average inventory be?
d. What is the total cost of inventory expected to be?
7-12. Solution:
Howe Corp.
a.
b. 126,000 units/1,000 units = 126 orders
c. EOQ/2 = 1,000/2 = 500 units (average inventory)
d. 126 orders × \$4 ordering cost = \$ 504
500 units × \$1.008 carrying cost per unit = 504
Total costs = \$1,008

13. (See Problem 12 for basic data.) In the second year, Howe Corporation finds it can reduce ordering costs to \$1 per order but that carrying costs will stay the same at \$1.008 per unit.
a. Recompute a, b, c, and d in Problem 12 for the second year.
b. Now compare years one and two and explain what happened.
7-13. Solution:
Howe Corp. (Continued)
a.
126,000 units/500 units = 252 orders
EOQ/2 = 500/2 = 250 units (average inventory)
252 orders × \$1 ordering cost = \$252
250 units × \$1.008 carrying cost per unit = 252
Total costs = \$504
b. The number of units ordered declines 50%, while the number of orders doubles. The average inventory and total...