Question

A product has demand of 4000 units per year. Ordering cost is $20 and holding cost is $4 per unit per year. The EOQ model is appropriate. The cost- minimizing solution for this product will cost _____ per year in total annual inventory costs.

a. $400
b. $800
c. $1200

Answer 1

b. $800

Step-by-step explanation:

For computing the total annual inventory cost first we have to compute the economic order quantity which is shown below:

`= \sqrt{\frac{2* \text{Annual demand}* \text{Ordering cost}}{\text{Carrying cost}}}`

`= \sqrt{\frac{2* \text{4,000}* \text{\$20}}{\text{\$4}}}`

= 200 units

The total cost of ordering cost and carrying cost equals to

= Annual ordering cost + Annual carrying cost

= Annual demand ÷ Economic order quantity × ordering cost per order + Economic order quantity ÷ 2 × carrying cost per unit

= 4,000 ÷ 200 units × $20 + 200 ÷ 2 × $4

= $400 + $400

= $800

We simply applied the above formulas