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529 Questions and Answers

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What is the incremental cost of placing an order that would be used in the EOO model?
A. US $35
B. US $24
C. US $48
D. US $19
Answer: D
The incremental cost of additional orders equals the variable costs incurred in purchasing and receiving inventory but not costs associated with shipping). Using the high-low method of analysis, these variable costs can be computed by determining the apparent variable costs for the two given levels of activity. For 160 orders, the relevant costs with a variable element include purchasing clerks, US $1,750: supplies, US $400, and receiving clerks, US $2,200.
The total is US $4,350. For 100 orders, these costs are US $1,250, US $260, and US $1,700, respectively, for a total of US $3,210. As the number of orders increased by 60, the costs increased by US $1 .140. Consequently, the variable or incremental costs per order must have been US $19 $1 .140 - 60 orders). Candman Company is a wholesale distributor of candy. The company leases space in a public warehouse and is charged according to the square feet occupied. Candman has decided to employ the economic order quantity 0Q) method to determine the optimum number of cases of candy to order. The company placed 2,400 orders last year. Data for the high-activity month, the low-activity month, and the year for the purchasing and warehouse operations appear in the next column. The annual charges for the warehouse totaled US $12,750 last year. In addition, the annual insurance and property taxes on the candy stored in the warehouse amounted to US $1,500 and US $2,250, respectively. The average monthly inventory last year was US $75,000.


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