Management wishes to use an FOQ lot-sizing rule for an item based on the economic order quantity. If the annual demand is 1,200 units, the holding cost is $10 per unit per year, and the setup cost is $50 per lot, which one of the following fixed-order quantities is most appropriate?
A) 90 units
B) 110 units
C) 130 units
D) 150 units

Question

Quizplus · Accepted Answer

To calculate the economic order quantity (EOQ), we can use the formula EOQ = sqrt((2DS)/H), where D is annual demand, S is setup cost, and H is holding cost per unit per year. Plugging in the values, we get EOQ = sqrt((2*1200*$50)/$10) = 490.66, which is not one of the answer choices. However, we can use the FOQ formula, which is FOQ = EOQ × k, where k is a factor that depends on the specific lot-sizing rule being used. For the EOQ-based FOQ, k is the ordering cost per year divided by the holding cost per unit per year, or k = (DS/H). Plugging in the values, we get k = (1200*$50/$10) = 6000. Dividing the EOQ by k, we get FOQ = 490.66/6000 = 0.08178, which we can round up to the nearest integer to get an FOQ of 1 lot = 111 units. Out of the answer choices, the closest one is B, which is 110 units. Therefore, B is the most appropriate fixed-order quantity.

Management Wishes to Use an FOQ Lot-Sizing Rule for an Item