What is the Optimal Number of Boxes?
The optimal number of boxes to order each time an order is placed can be calculated using several formulas. First of all, the overall number of boxes to deliver 98.000 pairs should be determined. Regarding the fact that the shoes are packed ten pairs per box, the following formula is used:
Annual demand = 98,000 pairs/10 pairs per box = 9,800 boxes
In such a way, the total number of boxes needed to transport all shoes is 9,800. As it comes from the description, the cost for the box is $59, and the holding cost comprises 35% of each shipping box. For this reason, the holding cost is 35% from $517:
Holding cost= 35%×$517= $180.95 ($181).
Therefore, possessing this information, we can calculate the optimal number of boxes per order (Q) using the following formula:
(Q) = √((2×Annual demand cost×Cost per box)/Holding cost) = √((2×2,800 boxes×$59)/$180.95) = 79.942 (80 boxes).
Altogether, concerning the existing holding cost, annual demand, and cost per box, the optimal number of boxes is 80. It will meet the companys requirements and satisfy buyers demands.
What is the Total Annual Ordering Cost?
The total annual ordering cost can be acquired by multiplying the number of orders placed annually and the cost per order. To figure out the number of orders placed annually, annual demand should be divided by the order quantity:
Number of orders placed annually = Annual demand/Order quantity = 9,800 boxes/80 boxes = 122.5
Using this number, we can calculate the annual ordering cost using the following formula:
Annual ordering cost = number of orders placed annually×cost per order = 122.5×$59 = $7227.5.
Resting on the given data and deviation between the annual holding cost and ordering cost, it is possible to say that the forecast has not passed the reasonability test. A critical divergence between annual holding and ordering costs evidence that the company has not managed to attain the optimal order quality, which will have a negative impact on its functioning. It can be explained by the fact that the annual holding cost ($181) is significantly higher than the ordering cost ($59). It indicates that all expenses associated with the inventory and its management remain high. The optimal order quality can be achieved only when both annual ordering and annual holding costs are the same or the difference is insignificant.