A product has demand of 4000 units per year. Ordering cost is $20 and holding cost is $4 per unit per year. The EOQ model is appropriate. The cost-minimizing solution for this product will cost __________ per year in total annual inventory costs.
A) $400
B) $800
C) $1200
D) Zero; this is a class C item.
E) Cannot be determined because unit price is not known.

Question

Quizplus · Accepted Answer

Total annual inventory cost can be calculated using the formula: 
Total annual inventory cost = (ordering cost * demand) / EOQ + (holding cost * EOQ) / 2

EOQ can be calculated using the formula: 
EOQ = sqrt((2 * ordering cost * demand) / holding cost)

Plugging in the given values: 
EOQ = sqrt((2 * 20 * 4000) / 4) = 400
Total annual inventory cost = (20 * 4000) / 400 + (4 * 400) / 2 = $800

Therefore, the cost-minimizing solution for this product will cost $800 per year in total annual inventory costs.

A Product Has Demand of 4000 Units Per Year