Mungo Pet Supplies makes cat trees for several pet store chains. They order rolls of carpet (used to cover the trees) from a supplier. Mungo's management has decided to use an EOQ model. The annual demand for carpet is estimated to be 1,000 rolls. The purchase price per roll is $20 and estimated inventory carrying cost rate is 25%. The cost to place an order from the supplier is $30. What is the optimal order quantity?

Question

Quizplus · Accepted Answer

Using the EOQ formula: 
EOQ = sqrt((2DS)/H)

D = Annual demand = 1000
S = Cost to place order = $30
H = Inventory carrying cost rate = 25% of $20 = $5

EOQ = sqrt((2 * 1000 * 30) / 5) = sqrt(12,000) = 109.5

Therefore, the optimal order quantity is 109.5 rolls.

Mungo Pet Supplies Makes Cat Trees for Several Pet Store