Question

William​ Beville's computer training​ school, in​ Richmond, stocks workbooks with the following​ characteristics:

Demand D= 19,500 ​units/year
Ordering cost= ​$25​/order
Holding cost H ​= $4​/unit/year

a. Calculate the EOQ for the workbooks.
b. What are the annual holding costs for the workbooks?
c. What are the annual ordering costs?

Answer 1

a. Calculate the EOQ for the workbooks = 493.71 units

b. What are the annual holding costs for the workbooks? = $987.42

c. What are the annual ordering costs = $987.42

SOLUTION

FORMULA FOR CALCULATING ECONOMIC ORDER QUANTITY IS

a. EOQ = √2 X D X S/H

Where:

Demand D= 19,500 ​units/year

Ordering cost= ​$25​/order

Holding cost H ​= $4​/unit/year

∴ EOQ = √2 x 19,500 x 25/4

= √39,000 x 6.25

= √243750

EOQ = 493.71 units

b. What are the annual holding costs for the workbooks?

Holding cost H ​= $4​/unit/year

Annual Holding Cost = 493.71/2 x 4 = $987.42

= $396,000.00

∴ Holding cost H = $396,000.00

c. Find the Ordering Cost = ​$25​/order

Annual Ordering Cost = 19,500 /493.71 x $25 = $987.42

Answer 2

a) 493.71

b) 987.42

c) 987.42

Step-by-step explanation:

a) The formula for Economic Order Quantity (EOQ) is :

EOQ =
`√(2DS/H)` where

• D : Demand in Units (typically on annual basis)
• S : Order cost (per purchase order)
• H : Holding Cost (per unit, per year

Therefore EOQ =
`\sqrt{(2*19,500*25)/(4) }`

EOQ = 493.71

b) Annual Holding Cost= (Q * H) / 2 =
`(493.71*4)/(2)` = 987.42

c) Annual ordering cost = (D * S) / Q =
`(19500*25)/(493.71)` = 987.42