Question

Henry​ Crouch's law office has traditionally ordered ink refills 50 units at a time. The firm estimates that carrying cost is 40​% of the ​$9 unit cost and that annual demand is about 235 units per year. The assumptions of the basic EOQ model are thought to apply. For what value of ordering cost would its action be​ optimal? ​a) For what value of ordering cost would its action be​ optimal? Its action would be optimal given an ordering cost of ​$ 19.15 per order ​(round your response to two decimal​ places). ​b) If the true ordering cost turns out to be much greater than your answer to part​ (a), what is the impact on the​ firm's ordering​ policy? A. The order quantity should be increased. Your answer is correct.B. The order quantity should be decreased. C. The order quantity should not be changed.

Answer 1

a. $19.15

b. A. The order quantity should be increased. Your answer is correct.

Step-by-step explanation:

a) For what value of ordering cost would its action be​ optimal?

Carrying cost = 40​% * ​$9 = $3.60

Optimal ordering cost = (50^2 × 3.60) ÷ (2 × 235) = $19.15.

Therefore, the optimal ordering cost of $ 19.15 per order will make his action to be optimal

​b) If the true ordering cost turns out to be much greater than your answer to part​ (a), what is the impact on the​ firm's ordering​ policy?

A. The order quantity should be increased.

The reason is that any ordering cost higher than $19.15 will not be optimal and result to a loss. The best to avoid this is to reduce order quantity.