A store uses 900 cases of electronic parts each year. The cost of storing one case for a year is 80 cents and the ordering fee is $40 per shipment. How many cases should the store order each time to minimize total cost? Assume the orders are planned so that a new shipment arrives just as the number of cases in the store reaches zero. Also assume the parts are consumed at a constant rate.
A) 300 cases
B) 600 cases
C) 900 cases
D) 1,000 cases

Question

Quizplus · Accepted Answer

The Economic Order Quantity (EOQ) formula is used to minimize the total cost of inventory management, which includes the costs of ordering and holding inventory. The EOQ formula is $\sqrt{\frac{2DS}{H}}$, where $D$ is the annual demand (900 cases), $S$ is the ordering cost ($40), and $H$ is the holding cost per unit per year ($0.80). Plugging in the values, we get $\sqrt{\frac{2*900*40}{0.80}} = \sqrt{\frac{72000}{0.80}} = \sqrt{90000} = 300$ cases.

A Store Uses 900 Cases of Electronic Parts Each Year