Question

Henry Crouch's law office has traditionally ordered ink refills 50 units at a time. The firm estimates that camying cost is 40% of the S 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 per order round your response to two decimal places)​b) If the true ordering cost turns out to be much greater greater than your answer to part​ (a), what is the impact on the​ firm's ordering​ policy? A. The order quantity should be decreased decreased. B. The order quantity should not be changed. C. The order quantity should be increased increased.

Answer 1

Ordering cost = $23.40

C. The order quantity should be increased increased.

Step-by-step explanation:

As per the data given in the question,

Number of units = 50

Camying cost = 40% of S 11 unit cost

= 40% × 11 = $4.4

Annual demand = 235 units per year

As per the following formula,

a)

Quantity = (2 × Annual demand × ordering cost ÷ camying cost) ^1/2

50 = (2 × 235 × S ÷ 4.4) ^1/2

S = 50^2 × 4.4 ÷ (2 × 235)

= $23.40

b)

Let S be $50

Quantity = ((2 × 235 × 50) ÷ 4.4) ^1/2

= 73.08

= 73 units

So, the order quantity increased with the price.