A law firm always orders 50 cases of paper from their office supply company. They incur an annual holding cost of $15 per case and have an ordering cost of $25 each time they place an order. If their annual demand is 480 cases, how much could they save annually by switching to their economic order quantity

$15

Explanation:

For calculating the saving amount, first need to find out the economic order quantity, total cost etc

The economic order quantity is

= 40 units

Now the total cost is

= Annual ordering cost + Annual carrying cost

= Annual demand ÷ Economic order quantity × ordering cost per order + Economic order quantity ÷ 2 × carrying cost per unit

= 480 ÷ 40 × $25 + 40 ÷ 2 × $15

= $300 + $300

= $600

Now the total cost in case of 50 cases is

= Annual ordering cost + Annual carrying cost

= Annual demand ÷ Economic order quantity × ordering cost per order + Economic order quantity ÷ 2 × carrying cost per unit

= 480 ÷ 50× $25 + 50 ÷ 2 × $15

= $240 + $375

= $615

So, the annual saving cost is

= $615 - $600

= $15

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