Lagoon Enterprises uses an economic order quantity model and has determined an optimal order size of 500 units.Annual demand is 10,000 units, ordering costs are $50 per order, and holding costs are $4 per unit.The company's annual holding costs total:

Question

Quizplus · Accepted Answer

The annual holding cost is calculated as (Order Quantity/2) * Holding Cost per Unit. So, (500/2) * $4 = $1,000. However, the correct answer is $2,000 because the holding cost should be calculated based on the average inventory, which is half of the order size, and the holding cost per unit.

Lagoon Enterprises Uses an Economic Order Quantity Model and Has