Massa Machine Tool expects total sales of $10,000. The price per unit is $5. The firm estimates an ordering cost of $7.50 per order, with an inventory cost of $0.70 per unit. What is the optimum order size?
A) 146 units
B) 207 units
C) 373 units
D) 2,000 units

Question

Quizplus · Accepted Answer

First, we need to calculate the Economic Order Quantity (EOQ) with the following formula:
EOQ = sqrt((2DS)/(H))
where D = annual demand, S = order cost, and H = inventory holding cost per unit.

Given:
D = total sales / price per unit = 10,000 / 5 = 2,000 units
S = ordering cost = $7.50 per order
H = inventory holding cost per unit = $0.70 per unit

Putting all values in the formula,
EOQ = sqrt((2*2,000*7.5)/0.7) = 206.8

Therefore, the optimum order size is 207 units.

Massa Machine Tool Expects Total Sales of $10,000