Question

A manager receives a forecast for next year. Demand is projected to be 510 units for the first half of the year and 1,020 units for the second half. The monthly holding cost is $2 per unit, and it costs an estimated $55 to process an order. a. Assuming that monthly demand will be level during each of the six-month periods covered by the forecast (e.g., 85 per month for each of the first six months), determine an order size that will minimize the sum of ordering and carrying costs for each of the six-month periods.

Answer 1

290 units

Step-by-step explanation:

The order size that will minimize the sum of ordering and carrying costs is known as the Optimum Order Quantity or Economic Order Quantity (EOQ).

At this point, the Ordering and Carrying costs will be at their minimal.

Optimum Order Quantity = √2 × Annual Demand × Ordering Cost per unit ÷ Holding Cost per unit

Where,

Annual Demand = 1st half + 2nd half

= 510 units + 1,020 units

= 1,530 units

Therefore

Optimum Order Quantity = √ (2 × 1,530 units × $55) ÷ $2

= 290

Conclusion

The order size that will minimize the sum of ordering and carrying costs is 290 units