A company annually consumes 10,000 units of Part
C The carrying cost of this part is $2 per year and the ordering costs are $100.The company uses an order quantity of 500 units.By how much could the company reduce its total costs if it purchased the economic order quantity instead of 500 units?

Question

Quizplus · Accepted Answer

The Economic Order Quantity (EOQ) formula is used to minimize the total inventory costs, which include ordering and carrying costs. The EOQ is calculated as √((2DS)/H), where D is the demand (10,000 units), S is the ordering cost ($100), and H is the carrying cost per unit ($2). Calculating EOQ gives approximately 1,000 units. The current order quantity is 500 units. By switching to EOQ, the company can reduce its total costs by $500.

A Company Annually Consumes 10,000 Units of Part