Overland has a part with a unit cost of $40. It costs $52 to place, process and receive an order. The carrying cost of the inventory is approximately 20% of the part's dollar value per year. The firm uses 2,000 of the parts each year. What order quantity minimizes total inventory cost?
A)93
B)127
C)161
D)205

Question

Quizplus · Accepted Answer

Using the Economic Order Quantity (EOQ) formula:
EOQ = sqrt((2DS)/H)
where D = annual demand, S = setup cost, and H = holding cost per unit

Annual demand = 2,000 units
Setup cost = $52
Holding cost per unit = $40 x 0.20 = $8

EOQ = sqrt((2 x 2,000 x 52)/8) = 160.62

Therefore, the optimal order quantity is 161 units (rounded up), which minimizes total inventory cost.

Overland Has a Part with a Unit Cost of $40