Question

A firm has been ordering a certain item 600 units at a time.

 

The firm estimates that ordering cost is $200/order, and that annual demand is 1800 units per year. The assumptions of the basic EOQ model are thought to apply.

 

For what value of holding cost (H: avg $cost of holding one piece for 1 year) would their ordering policy (600 units per order) be economically optimal (be the EOQ)?

EOQ = Sq Root[(2D*S)/H]

 

Where: D annual demand in units

S = cost of placing 1 order

H = cost of holding 1 unit of that item in inventory for 1 year

Answer 1

Inventory management is the process by which inventory and stock items are supervised. Inventory management is the proper management of flow of goods from manufacturers to warehouses to the point of sale.

Economic Order Quantity refers to the number of unit the company should add to the inventory and the order is made to minimize the total inventory cost. It maintain a balance between ordering costs and carrying costs.

Holding cost or carrying cost is nothing but percentage of inventory value which include taxes, insurance, cost of storage, opportunity cost, depreciation, cost of good damaged, labor cost, utilities cost and the cost of capital for the company.

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