Question

Please show me how to solve it step by step!

For a certain item, the cost-minimizing order quantity obtained with the basic EOQ model is 200 units, and the total annual inventory (carrying and setup) cost is $600. What is the inventory carrying cost per unit per year for this item?

A) $1.50

B) $2.00

C) $3.00

D) $150.00

E) not enough data to determine

Answer: C

Answer 1

Economic order quantity (EOQ) = 200 Units

Total annual inventory cost which is carrying cost plus setup cost is $600

With the ordering policy of EOQ the annual ordering cost and annual carrying cost are same. So here the Total annual carrying cost is half of the total annual inventory cost of $600

So Total aanul carrying cost = $600/2 = $300

The formula to calculate total annual carrying cost is (EOQ/2) H, where H is the inventory carrying cost per unit per year

Total annual carrying cost = (EOQ/2) H

=> 300 = (200/2) H

=> 300 = 100 × H

=> H = 300/100

=> H = 3

So the answer is option C