Question

Iron Hill Pallet Company produces hardwood mulch by grinding used pallets. The company’s grinder can produce 11 cubic yards of mulch per hour and operates the grinder 24 hours per day for 250 days per year. The annual demand for mulch is 40,000 cubic yards. It costs Iron Hill $200 to setup the grinder for production. It costs iron hill $20 to produce a cubic yard of mulch, and they use a factor of 10% to calculate the inventory holding cost. Calculate the economic production quantity for mulch.

Answer 1

Answer: EOQ = 2828.43 cubic yards

Explanation:

Given the following:

Annual demand for mulch = 40000 cubic yards

Ordering cost = $200

Cost per unit = $20

Inventory holding cost (%) = 10%

Therefore,

Holding cost of mulch = cost per unit × holding cost(%) = $20 × 10% = $2

Economic order quantity (EOQ):

√(2 × annual demand × ordering cost ) / holding cost

EOQ = √(2 × 40000 × 200) / 2

EOQ = √16000000 / 2

EOQ = √8000000

EOQ = 2828.4271

EOQ = 2828.43 cubic yards