Question

Demand is projected to be 600 units for the first half of the year and 900 units for the second half. The monthly holding cost is $2 per unit, and it costs $55 to process an order. Assuming that monthly demand will be level during each of the six-month periods covered by the forecast (e.g., 100 per month for each of the first six months), determine an order size that will minimize the sum of ordering and carrying costs for each of the six-month periods

Answer 1

74 units and 90 units.

Step-by-step explanation:

So, we have the demand for the first six months, K1 = 600 units = 600 units/ 6months = 100 units; the demand for the second six months, K2 = 900 units = 900/6 = 150 units; holding cost,J = $2 per unit ; process cost, P = $55 per order.

The formula for determining an order size that will minimize the sum of ordering and carrying costs for each of the six-month periods is the Economic Order Quantity formula which is given below;

Economic Order Quantity = √[ (2 × K1 × P)/ J ].

(1). For the first six months;

Economic Order Quantity = √ [ ( 2 × 100 × 55)/ 2].

Economic Order Quantity = 74 units.

(2). For the second six months.

Economic Order Quantity = √ [ ( 2 × 150 × 55)/ 2].

Economic Order Quantity = 90 units.