Question

A firm expects to sell 1000 units of its best-selling product in the coming year. Ordering costs for this product are $100 per order, and carrying costs are $2 per unit. Compute the optimum order size, using the EOQ model

a. 10 units
b. 224 units
c. 317 units
d. 448 units

Answer 1

The optimum order size for the firm using the Economic Order Quantity model is 317 units (d).

Step-by-step explanation:

We can calculate the optimum order size for the firm using the Economic Order Quantity (EOQ) model. The EOQ model is designed to minimize the total cost of inventory management by finding the ideal order quantity that minimizes the sum of ordering costs and carrying costs.

The formula for EOQ is:

EOQ = √((2 * Demand * Ordering Cost) / Carrying Cost)

Plugging in the given values:

• 
  
• Demand = 1000 units/year
• 
  
• Ordering Cost = $100/order
• 
  
• Carrying Cost = $2/unit/year

EOQ = √((2 * 1000 * $100) / $2) = √100,000 = 316.227766, which we round up to the nearest whole number, giving us 317 units.

The optimum order size for the firm, using the EOQ model, is 317 units.