Question

Hermit Company manufactures a line of walnut office products. Hermit executives estimate the demand for the double walnut letter tray, one of the company’s products, at 6,000 units. The letter tray sells for $ 80 per unit. The costs relating to the letter tray are estimated to be as follows for 20XX: a. Standard manufacturing cost per letter tray unit—$ 50 b. Costs to initiate production run—$ 300 c. Annual cost of carrying the letter tray in inventory— 20% of standard manufacturing cost In prior years, Hermit Company has scheduled the production for the letter tray in two equal production runs. The company is aware that the EOQ model can be employed to determine optimal size for production runs. The EOQ formula as it applies to inventories for determining the optimal order quantity is as follows:



Required
Calculate the expected annual cost savings Hermit Company could experience if it employed the EOQ model to determine the number of production runs that should be initiated during the year for the manufacture of the double walnut lettertrays.


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  • CreatedFebruary 26, 2015
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