Hardy Hospital Is Implementing the Economic Order Quantity (EOQ) Inventory

question 16

Multiple Choice

Hardy Hospital is implementing the economic order quantity (EOQ) inventory control system, and they need a good cost estimate to process a purchase order (PO) . It takes 4 total labor hours to process a PO. The average number of stock-keeping units (SKUs) on a PO is 4. The average wage for people working in the purchasing department is $22 per hour, plus employee benefits of $3 per hour. Fixed costs for the purchasing department are $300,000 per year assuming 2,000 hours per employee per year workweek. From the given information what is a good estimate of order cost (Co) to use in the EOQ model?

• A) Less than $10
• B) More than $10 but less than or equal to $20
• C) More than $20 but less than or equal to $30
• D) More than $30 but less than or equal to $40

---

Definitions:

Direct Labor-Hours

The complete count of hours expended by personnel directly part of the process in making a product or providing a service.

Standard Cost System

An accounting method that uses cost estimates for labor and materials to plan a budget and measure performance.

Fixed Manufacturing Overhead

Costs that do not vary with the level of production, such as rent, salaries, and insurance associated with manufacturing.

Variances

Differences between expected and actual performance in business metrics such as costs, revenues, and production levels.