Question

Refer to the equation for the EOQ in the text. Car Country, a local Ford ealer, sells 1,280 small SUVs each year. Keeping a car on the lot costs $200 per month, so the company prefers to order as few SUVs as is economically feasible. However, each time an order is placed, the company incurs total costs of $300. Of this $300, $240 is fixed and $60 is variable. Determine the company's economic order quantity.

a. 8
b. 16
c. 18
d. 56
e. 62

Answer 1

The Economic Order Quantity (EOQ) for Car Country, given an annual demand of 1,280 SUVs, an ordering cost of $300 per order, and a holding cost of $200 per month per SUV, is calculated to be 18 SUVs.

Step-by-step explanation:

The student is asking about the Economic Order Quantity (EOQ), which is a formula used in supply chain management to determine the optimal order size that minimizes total inventory costs. The costs considered in the EOQ formula include holding costs and ordering costs. In this specific case, Car Country sells 1,280 small SUVs annually, incurs a holding cost of $200 per month for each SUV, and has an ordering cost of $300 per order with $240 fixed and $60 variable. The EOQ formula is:

EOQ = √((2DS)/H), where:
D = demand rate (annual)
S = ordering cost (per order)
H = holding cost (per unit per year)
For Car Country, the demand rate (D) is 1,280 SUVs per year, the ordering cost (S) is $300 per order, and the holding cost (H) is $200 per month, or $2,400 per year (since $200 x 12 = $2,400).

To calculate the EOQ for Car Country, we insert the given values into the formula:

EOQ = √((2 x 1,280 x 300)/2,400)

EOQ = √((768,000)/2,400)

EOQ = √320

EOQ = 17.89

Since EOQ cannot be a fraction of a car, we round up to the nearest whole number, which gives us an EOQ of 18 SUVs. Therefore, Car Country's economic order quantity is 18 SUVs.