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 is
A)$100,000.
B)$5,000.
C)$2,500
D)$50,000

Question

Quizplus · Accepted Answer

To calculate the total annual inventory cost using the EOQ formula, we need to use the following formula:

Total Annual Inventory Cost = (Ordering Cost * Annual Demand / EOQ) + (EOQ / 2 * Holding Cost per Unit)

First, we need to calculate the EOQ:

EOQ = sqrt((2 * Annual Demand * Ordering Cost) / Holding Cost per Unit)

Plugging in the given values, we get:

EOQ = sqrt((2 * 40,000 * $125) / $2.50) = 2,000 units

Now we can calculate the total annual inventory cost:

Total Annual Inventory Cost = ($125 * 40,000 / 2,000) + (2,000 / 2 * $2.50) = $2,500

Therefore, the total annual inventory cost for this product is $2,500. The best choice is C.

Annual Demand for a Product Is 40,000 Units