Question

Item X is a standard item stocked in a company's inventory of component parts. Each year the firm, on a random basis, uses about 1,700 of item X, which costs $25 each. Storage costs, which include insurance and cost of capital, amount to $8 per unit of average inventory. Every time an order is placed for more of item X, it costs $26. a. Whenever item X is ordered, what should the order size be

Answer 1

EOQ = 105.11898 rounded off to 105 units per order

Step-by-step explanation:

To calculate the optimum order size when each order is placed, we need to find the EOQ or Economic order quantity. It is the quantity that should be ordered each time to minimize the inventory related costs. The formula to calculate EOQ is attached. The EOQ is calculated as follows.

EOQ = √[(2 * 1700 * 26) / 8]

EOQ = 105.11898 rounded off to 105 units