Question

Cheap hardware company expects to sell approximately 108,000 bags of tororo cement during the coming year. annual holding costs are shs.3000 per bag of cement and ordering costs are shs. 12500 per bag. the company expects to operate for 360 days during the coming year.

determine the optimal order quantity.

Answer 1

The optimal order quantity for the cement company, calculated using the Economic Order Quantity (EOQ) formula, is approximately 949 bags. This number balances the costs of ordering and holding inventory.

Step-by-step explanation:

The question involves determining the optimal order quantity for a company selling cement bags, which is a common problem in the field of inventory management. To solve this, we use the Economic Order Quantity (EOQ) model. The EOQ model minimizes the total cost of inventory management by balancing the ordering costs and the holding costs.

To calculate EOQ, we can use the formula:

EOQ = √(2DS/H), where D is the demand, S is the ordering cost, and H is the holding cost per unit.

In this case, D = 108,000 bags, S = 12,500 shillings per order, and H = 3,000 shillings per bag.

Using the formula:

EOQ = √(2 * 108,000 * 12,500 / 3,000) = √(2,700,000,000 / 3,000) = √900,000 = 948.68

The optimal order quantity for Cheap hardware company is approximately 949 bags of tororo cement.

It is essential to round up the EOQ to the nearest whole number since you cannot order a fraction of a bag.