Scenario 12-1.
Brian's Bicycle Manufacturing Company is having inventory control problems. Furthermore, inventory is critical to the cash flow of the business since each order requires a substantial cash outlay. Brian has been ordering through the use of visual control, but recently key components have run short and stopped the assembly line. Production has been increasing monthly due to increased demand. The demand for the bikes is 12,000 a year with the average ordering cost being $12. The cost of holding the inventory is $.95 per item. Brian comes to you for advice.
-In Scenario 12-1 above, using the economic order quantity (EOQ) model, figure the number of orders Brian should make each year.

Question

Scenario 12-1. 
Brian's Bicycle Manufacturing Company is having inventory control problems. Furthermore, inventory is critical to the cash flow of the business since each order requires a substantial cash outlay. Brian has been ordering through the use of visual control, but recently key components have run short and stopped the assembly line. Production has been increasing monthly due to increased demand. The demand for the bikes is 12,000 a year with the average ordering cost being $12. The cost of holding the inventory is $.95 per item. Brian comes to you for advice.
-In Scenario 12-1 above, using the economic order quantity (EOQ) model, figure the number of orders Brian should make each year.

Quizplus · Accepted Answer

Using the economic order quantity (EOQ) formula:
EOQ = sqrt((2*annual demand*ordering cost)/holding cost per unit)
EOQ = sqrt((2*12,000*$12)/$0.95) = 389.71
Therefore, Brian should make 389 orders a year, but since he cannot make fractional orders, he should order 123 times a year, which is the closest whole number to 389.

Scenario 12-1. Brian's Bicycle Manufacturing Company Is Having Inventory Control Problems. Furthermore