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 average inventory level for this product would be
A)20,000 units.
B)10,000 units.
C)2,500 units.
D)1,000 units.

Question

Quizplus · Accepted Answer

The EOQ formula is used to minimize the total cost of ordering and holding inventory. The average inventory level when ordering at EOQ is EOQ/2. The EOQ is calculated as √((2 * Demand * Order Cost) / Holding Cost). Plugging in the values: √((2 * 40,000 * 125) / 2.5) = 2,000 units. Therefore, the average inventory level is 2,000/2 = 1,000 units.

Annual Demand for a Product Is 40,000 Units