Lauren Company orders 250 units at a time and places 15 orders per year.Total ordering cost is $1,600,and total carrying cost is $1,250.What is the economic order quantity?
A)The economic order quantity (EOQ) is 250.
B)The economic order quantity (EOQ) is more than 250.
C)The economic order quantity (EOQ) is less than 250.
D)The economic order quantity (EOQ) is 15.

Question

Quizplus · Accepted Answer

To calculate the economic order quantity (EOQ), we can use the formula:

EOQ = √((2DS) / H)

Where:
D = Annual demand (in units)
S = Ordering cost per order
H = Holding cost per unit per year

To substitute the values given in the problem:

D = 250 x 15 = 3750 units
S = $1,600 / 15 = $106.67 per order
H = $1,250 / 3750 = $0.333 per unit per year

EOQ = √((2 x 3750 x $106.67) / $0.333) ≈ 3,190

Since the EOQ is greater than the order quantity of 250, we can conclude that the best choice is to order more than 250 units at a time. This will result in lower ordering costs per unit, but higher carrying costs per unit. Ultimately, the optimal order quantity will balance these two costs to minimize the total inventory costs.

Lauren Company Orders 250 Units at a Time and Places