High-Rise Building Company uses 400,000 tons of stone per year. The carrying costs are
$100/ton. The cost per order is $500. Calculate the optimal annual order costs.

Question

Quizplus · Accepted Answer

To calculate the optimal order quantity, we need to use the Economic Order Quantity (EOQ) model.

EOQ = sqrt(2DS/H)

where:
D = annual demand (400,000 tons)
S = cost per order ($500)
H = carrying cost per unit per year ($100/ton)

Plugging in the values, we get:

EOQ = sqrt(2 x 400,000 x 500 / 100) = 4,000 tons per order

To calculate the optimal annual order costs, we need to divide the annual demand by the EOQ and multiply it by the cost per order:

Optimal annual order costs = (400,000 / 4,000) x $500 = $50,000

Therefore, the answer is B. The optimal annual order costs are $50,000.

High-Rise Building Company Uses 400,000 Tons of Stone Per Year