The annual demand for a product has been projected at 2,000 units.This demand is assumed to be constant throughout the year.The ordering cost is $20 per order, and the holding cost is 20 percent of the purchase cost.Currently, the purchase cost is $40 per unit.There are 250 working days per year.Whenever an order is placed, it is known that the entire order will arrive on a truck in 6 days.How many units should the company order each time an order is placed if the company wishes to minimize total inventory cost?
A)100
B)200
C)250
D)500

Question

Quizplus · Accepted Answer

The economic order quantity (EOQ) is the optimal quantity to order each time an order is placed to minimize total inventory cost. The EOQ is given by the following formula:EOQ = sqrt((2*D*O)/H)where:D = annual demandO = ordering costH = holding cost per unitIn this case, the annual demand is 2,000 units, the ordering cost is $20 per order, and the holding cost is 20 percent of the purchase cost, which is $40 per unit. Therefore, the EOQ is:EOQ = sqrt((2*2000*20)/(0.2*40)) = 100 unitsTherefore, the company should order 100 units each time an order is placed to minimize total inventory cost.

The Annual Demand for a Product Has Been Projected at 2,000