Question

Consider an inventory system model where the annual ordering cost is $20,000 per year.

and the total annual holding cost is $44,000 per year. Suppose the company currently uses a consistent order size of 1500 units at a time (based on the executive's discussions with the supplier). Which one of the following statements is true about the optimal order quantity (EOQ)?
O EOQ - 1500
O EOQ > 1500
O EOQ < 1500
O We cannot make any determination with the given information

Answer 1

With the information given, which only includes annual ordering and holding costs, it is not possible to determine the optimal order quantity (EOQ) in relation to the company's current order size. The EOQ calculation requires the demand in units, which is not provided.

Step-by-step explanation:

The question relates to the inventory system model known as the Economic Order Quantity (EOQ). The annual ordering cost is given as $20,000, and the total annual holding cost is $44,000. We must determine whether the optimal order quantity is less than, greater than, or equal to the currently used order size of 1500 units.

The basic EOQ formula is EOQ = √((2DS)/H), where D is the demand in units (the number of units sold per year), S is the set-up or ordering cost per order, and H is the holding cost per unit per year. Given the annual ordering cost (S) and the annual holding cost (H), without the demand (D), it is impossible to determine the EOQ. Therefore, the statement that we can make about the EOQ with the given information is that we cannot determine if EOQ is less than, equal to, or greater than 1500 units without additional data.