Assume a 365 day year.
Smart Products buys 300,000 units of a crucial input per year from a supplier that fulfills its orders within two days of receiving them. Smart Products submits its orders directly to the supplier through a web interface, so its lead time is the supplier's two day turnaround time. Each order costs Smart Products about $500 to place, while carrying costs are about $60 per unit per year. The company seeks to maintain a five day usage level in a safety stock.
-What is Smart Product's economic order quantity (EOQ)for this input?

Question

Quizplus · Accepted Answer

The Economic Order Quantity (EOQ) formula is $\sqrt{\frac{2DS}{H}}$, where $D$ is the demand rate (300,000 units/year), $S$ is the ordering cost ($500/order), and $H$ is the holding cost per unit per year ($60/unit/year). Plugging in the values: $\sqrt{\frac{2*300,000*500}{60}}$ gives an EOQ of approximately 2236 units.

Assume a 365 Day Year