The Wonderlust Retail Company Ltd experiences relatively constant demand of 24 000 units per year for one of its products. The product, a coffee-making machine, costs the firm $30. Placing an order costs $200 and annual carrying costs are $2 per unit. The firm works 200 days per year and desires a safety stock of 300 units. The lead time for an order is 15 working days. The economic order quantity for Wonderlust is:

Question

Quizplus · Accepted Answer

Using the formula for economic order quantity (EOQ):

EOQ = sqrt((2DS)/H)

where:
D = annual demand = 24,000 units/year
S = ordering cost = $200/order
H = holding cost = $2/unit/year
(Lead time + Safety stock) = 15 + 300 = 315 units

EOQ = sqrt((2 x 24,000 x $200)/$2) = 2,191

Therefore, the best choice for Wonderlust Retail Company Ltd is to order 2,191 units at a time to minimize total inventory costs.

The Wonderlust Retail Company Ltd Experiences Relatively Constant Demand of 24