Question

A firm desires to control inventory levels so as to minimize the sum of holding and order costs. It costs the firm $50 to place an order. The firm estimates its annual carrying charge is 20%. Weekly demand is 100 units, and there are 50 weeks in the work year. The item costs $10 per unit. The lead-time for the product is 3 weeks. Assume that there are 5 working days per week. What quantity of items should the firm order each time so as to minimize total inventory costs, i.e., what is the EOQ?

A. 100
B. 224
C. 500
D. 1000
E. none of the above

Answer 1

C. 500

Explanation:

Given that

The ordering cost per order is $50

The carrying cost percentage is 20%

The weekly demand is 100 units and there are 50 weeks in the work year

The cost per unit is $10

We need to find out the economic order quantity i.e. EOQ

So we applied the above formula

= √(2 × weekly demand × no of weeks × ordering cost) ÷ √(carrying cost × cost per unit)

= √(2 × 100 × 50 × $50) ÷ √(20% × $10)

= √(500,000 ÷ 2)

= 500 units

hence, the option c is correct