Bounce Rubber Store sells 50 000 tyres per year.The wholesale price is $200 per tyre.The cost of processing each order to be placed with the wholesaler is $50 and carrying costs are $1 per tyre per year.What is the optimal time period between orders?

Question

Quizplus · Accepted Answer

The optimal time period between orders can be found using the Economic Order Quantity (EOQ) model and the formula to find the time between orders (TBO) once the EOQ is calculated. The EOQ formula is $\sqrt{\frac{2DS}{H}}$, where $D$ is the demand (50,000 tyres/year), $S$ is the ordering cost ($50/order), and $H$ is the holding cost per unit per year ($1/tyre/year). First, calculate EOQ: $\sqrt{\frac{2*50000*50}{1}} = \sqrt{5000000} = 2236.07$ tyres/order. Then, to find the time between orders, divide the annual demand by the EOQ to get the number of orders per year, and then find the time per order. Number of orders per year = $50000 / 2236.07 \approx 22.36$ orders/year. To find the time between orders in months, divide the number of months in a year by the number of orders per year: $12 / 22.36 \approx 0.536$ or approximately 1.86 months.

Bounce Rubber Store Sells 50 000 Tyres Per Year