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Aqua Ltd has forecast the yearly demand for its product as 5,000 units. 100 units of material must be used to produce the product. The cost of placing a single order for raw materials is $20, and the cost of holding one unit of material is $0.40 a year.
-Refer to the information above. The economic order quantity for raw materials is:

Question

Quizplus · Accepted Answer

The Economic Order Quantity (EOQ) formula is $\sqrt{\frac{2DS}{H}}$, where D is the demand (5,000 units), S is the ordering cost ($20), and H is the holding cost per unit ($0.40). Substituting these values gives $\sqrt{\frac{2*5000*20}{0.40}} = \sqrt{500,000} = 707.106781$, which rounds to 707 units. However, since each product requires 100 units of material, the EOQ for raw materials is 707 * 100 = 70,700 units, which is not an option provided. The closest option to the correct calculation is A) 7,071 units, indicating a mistake in my calculation. The correct calculation should consider the demand in terms of material units, which is 500,000 (5,000 products * 100 units of material per product), leading to the correct EOQ formula application.

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