Question

Suppose a gift shop in Myrtle Beach has an annual demand for 15,000 units for a souvenir kitchen magnet that it buys for $0.50 per unit. Assume it costs $10 to place an order and the inventory carrying cost is 25% of the item's unit cost. Use Solver to determine the optimal order quantity if the company wants to minimize the total cost of procuring this item.

a. What is the optimal order quantity? If necessary, round your answer to a whole number.

Answer 1

1,549 units

Step-by-step explanation:

a. The computation of the economic order quantity is shown below:

=
`\sqrt{\frac{2* \text{Annual demand}* \text{Ordering cost}}{\text{Carrying cost}}}`

where,

Annual demand is 15,000 units

Ordering cost is $10 per unit

And, the carrying cost = $0.50 per unit × 25% = 0.125

=
`\sqrt{\frac{2* \text{15,000}* \text{\$10}}{\text{\$0.125}}}`

= 1,549 units

We considered all the things i.e annual demand, ordering cost and the carrying cost so that the correct quantity can come.