Annual demand for a product is 40,000 units.The product is used at a constant rate over the 365 days the company is open every year.The annual holding cost for the product is estimated to be $2.50 per unit and the cost of placing each order is $125.00.If the company orders according to the economic order quantity (EOQ)formula then its total annual inventory cost for this product would be
A)$100,000.
B)$50,000.
C)$5,000.
D)$2,500.

Question

Quizplus · Accepted Answer

The EOQ formula minimizes total inventory costs, which include ordering and holding costs. The EOQ is calculated as √((2DS)/H), where D is demand (40,000 units), S is the ordering cost ($125), and H is the holding cost per unit ($2.50). The total cost is the sum of the ordering cost and holding cost at EOQ, which is $5,000.

Annual Demand for a Product Is 40,000 Units