Question

An item experiences an annual demand of 3500 units. It costs $5 to hold an item in inventory for one year and $35 to place an order. If the EOQ model is used, what is the time between orders? Assume that there are 52 business weeks in a year.

A. greater than 2 week but less than or equal to 3 weeks
B. greater than 1 week but less than or equal to 2 weeks
C. greater than 3 weeks
D. less than 1 week

Answer 1

The Economic Order Quantity (EOQ) model is used to determine the optimal order quantity that minimizes the total inventory holding costs and ordering costs. The time between orders in the EOQ model can be calculated by dividing the number of business weeks in a year by the EOQ. In this case, the time between orders is less than 1 week (D).

Step-by-step explanation:

The Economic Order Quantity (EOQ) model is used to determine the optimal order quantity that minimizes the total inventory holding costs and ordering costs. To calculate the time between orders, we need to find the EOQ. The EOQ formula is:

EOQ = sqrt((2 * Annual Demand * Ordering Cost) / Holding Cost)

Given that the annual demand is 3500 units, ordering cost is $35, and holding cost is $5, we can calculate the EOQ. Substituting the values into the formula:

EOQ = sqrt((2 * 3500 * 35) / 5) = sqrt(490000) = 700

Since there are 52 business weeks in a year, the time between orders can be calculated as:

Time between orders = 52 / EOQ = 52 / 700 ≈ 0.074 weeks

Therefore, the time between orders is less than 1 week (D).