Question

A supermarket expects to sell 1000 boxes of sugar in a year. Each box costs $2, and there is a fixed delivery charge of $20 per order. If it costs $1 to store a box for a year, what is the order size and how many times a year should the orders be placed to minimize inventory costs

Answer 1

Order size = 200 units

Number of order = 5 times

Step-by-step explanation:

The number of order per year will be equal to the Annual demand divided by the EOQ.

No of orders = Annual Demand / EOQ

Economic order quantity (EOQ)

The Economic Order Quantity (EOQ) is the order size that minimizes the balance of ordering cost and holding cost. At the EOQ, the carrying cost is equal to the holding cost.

It is computed using he formulae below

EOQ = √(2× Co× D)/Ch

Ch- Carrying cost per unit per annum- $1

Co- Ordering cost per order -20

EOQ =√(2× 20× 1000)/1

= 200 units

Order size = 200 units

Number of order = 1000/200 = 5 times