Question

The Summer Outdoor Furniture Company produces wooden lawn chairs. The annual demand from its store customers is 17,400 chairs per year. The transport and handling costs are $2,600 each time a shipment of chairs is delivered to stores from its warehouse. The annual carrying cost is $3.75 per chair. The company is thinking about relocating its warehouse closer to its customers, which would reduce transport and handling costs to $1,900 per order but increase carrying costs to $4.50 per chair per year. What is the Economic Order Quantity?

Answer 1

The Economic Order Quantity (EOQ) helps determine the optimal number of chairs to order to minimize costs. Initially, the EOQ for the Summer Outdoor Furniture Company is approximately 347 chairs. After relocating the warehouse, the EOQ becomes approximately 343 chairs.

Step-by-step explanation:

The Economic Order Quantity (EOQ) is the number of units that a company should add to inventory with each order to minimize the total costs of inventory—such as holding costs, order costs, and shortage costs. The EOQ formula is √((2DS)/H) where D is the demand rate, S is the order cost, and H is the holding cost per unit per year.

For the Summer Outdoor Furniture Company, the initial scenario before relocating the warehouse is: D = 17,400 chairs per year, S = $2,600 per shipment, and H = $3.75 per chair per year. Using these figures, the EOQ is √((2 * 17,400 * 2600) / 3.75) which simplifies to √((45,320,000) / 3.75) and finally calculates to an EOQ of approximately 347 chairs. Upon relocating the warehouse, the costs change to S = $1,900 per shipment and H = $4.50 per chair per year. This leads to a new EOQ of √((2 * 17,400 * 1900) / 4.50) which simplifies to √((66,120,000) / 4.50) and calculates to an EOQ of approximately 343 chairs.