Pottery House orders finished goods for the business quite frequently. The business generally orders 6,500 serving sets a year at $40 per set. Carrying costs are 20% of inventory and it costs $30 to place and receive an order. How many orders should Pottery House place per year and what should the size of each order be?

Question

Pottery  House orders finished goods for the business quite frequently. The business generally orders 6,500 serving sets a year at $40 per set. Carrying costs are 20% of inventory and it costs $30 to place and receive an order. How many orders should Pottery House place per year and what should the size of each order be?

Quizplus · Accepted Answer

Using the economic order quantity (EOQ) formula:
EOQ = sqrt(2DS/H)
Where:
D = annual demand (6,500 serving sets)
S = cost to place and receive an order ($30)
H = carrying cost as a percentage of inventory (20%)
Hence, H = 0.20($40) = $8

EOQ = sqrt[(2 x 6,500 x $30) / $8] = 221 sets

To calculate the number of orders per year:
Number of orders = annual demand / EOQ
Number of orders = 6,500 / 221 = 29.4

Therefore, Pottery House should place 29 orders of 221 sets per year, which would minimize the total annual inventory cost.

Pottery House Orders Finished Goods for the Business Quite Frequently