AberwaldAberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order, the purchase price per chip is $25, and the firm's inventory carrying costs is equal to 20% of the purchase price. (Assume a 360-day year.)
-Refer to Scenario: Aberwald.What is the economic ordering quantity for chips?
A)3,175
B)6,243
C)12,088
D)13,675

Question

Quizplus · Accepted Answer

The economic ordering quantity (EOQ) is the optimal quantity to order at a time to minimize the total inventory costs. The EOQ is given by the following formula:EOQ = √(2*D*O)/Hwhere:D = annual demandO = ordering costH = holding cost per unitIn this case, the annual demand is 126,000 chips, the ordering cost is $200, and the holding cost per unit is 20% of the purchase price, which is $5 ($25 * 0.20). Plugging these values into the formula, we get:EOQ = √(2*126,000*$200)/$5 = 3,175Therefore, the economic ordering quantity for chips is 3,175.

AberwaldAberwald Corporation Expects to Order 126,000 Memory Chips for Inventory