Question

MySchool Notebook Company uses 100,000 pounds of plastic pellets per year in the production of their custom 3-ring school binders. They buy the pellets at a cost of $0.75/lb delivered. They estimate that it costs them $100 to place and put away an order of pellets. They use an inventory holding rate of 20% of the cost of an item. Calculate the economic order quantity for plastic pellets for MySchool Notebook.

Answer 1

11547 lb

Step-by-step explanation:

Economic Order Quantity is the ordering quantity where the cost of ordering and holding inventory is the minimum. It is the point where the cost of ordering and holding inventory intersects.

To calculate the Economic Order Quantity we use the following formula,

• EOQ =√(2 × Annual Demand × Ordering Cost/Order) / Holding Cost per unit per annum

Plugging in the values in the formula,

• EOQ = √(2 × 100000 × 100) / 0.15 ⇒ 11547.00538 rounded off to 11547 lbs