Question

If D = 8,000 per month, S = $45 per order, and H = $2 per unit per year,

 

A. what is the economic order quantity?

B. How does your answer change if the holding cost doubles?

c. What if the holding cost drops in half?

 

Answer 1

Concepts and reason

Inventory: Inventory is the goods in which a particular entity deals in with to earn revenue. It is an asset to the entity which deals with it. It is reported under the head current assets in the balance sheet.

Demand: Demand is the quantity of units desired by consumers for a certain period at a fixed price. It is the quantity estimated to be sold for the period. If no demand exists, an organization cannot earn income.

Ordering Cost: Ordering cost is the cost for placing an order. It is the cost incurred to process an order for a certain period. It is computed to estimate the economic order quantity.

Holding Cost: Holding cost is the cost of holding the inventory that was unsold during a certain period. It is the cost incurred for holding and storing the unsold inventory. It is also known as carrying cost.

Fundamentals

Economic Order Quantity [EOQ]: Economic Order Quantity [EOQ] is the quantity to be ordered and purchased so that the costs relating to the inventory can be minimized. Costs relating to inventory includes holding costs, ordering costs. It is calculated using the following formula:

A.

Calculate the economic order quantity as shown below:

Thus, the economic order quantity is.

B.

Calculate the economic order quantity if the holding cost doubles as shown below:

Thus, the economic order quantity is.

C.

Calculate the economic order quantity if the holding cost drops in half as shown below:

Note: Compute the holding cost as shown below:

Thus, the economic order quantity is.

Ans: Part A

The Economic Order Quantity is 600 units.

Part B

The Economic Order Quantity is 424.26 units.

Part C

The Economic Order Quantity is 848.53 units.