Economic order quantity and internal controls

For this example, let’s assume an annual demand of 1000 cans of beans. Using this information along with our known costs (Ordering costs = $20; Carrying costs = $0.30/can per year; Interest rate = 5%), we can calculate that our EOQ would be 100 cans. This means that Meals should place orders for 100 cans each time in order to minimize total cost.

Now that we have determined our EOQ, we can also calculate our total ordering and carrying costs. Our total ordering costs will be equal to (# Orders/Year * Ordering Cost) or (1000/100 * 20) which comes out to $200 per year. Similarly, our total carrying cost will come out to (# Cans/Year*Carrying Cost + Interest on Inventory Balance) or (1000*$0.30 + ($1000*5%)) which equals $130 per year.

Therefore, in conclusion Meals should order 100 cans at a time with 10 orders placed throughout the course of one year in order to minimize their total cost while maintaining an appropriate level of inventory on hand at all times. Their total ordering and carrying cost will come out to $200 and $130 respectively each year