Question

a company sells 600 bottles of a dietary supplement per week at$ 100 per bottle. The supplement is ordered from a supplier who charges fixed cost of $30 per order, and $ 50 per bottle. The annual inventory holding cost is 40%. Assume the company operates 50 weeks in a year. What is the optimal number of bottles company should order?

Answer 1

the economic order quantity or optimal quantity = 300 bottles per order

Step-by-step explanation:

economic order quantity (EOQ) = √[(2SD) / H]

• S = cost per order = $30
• D = annual demand = 600 x 50 weeks = 30,000
• H = holding costs = $50 x 40% = $20

EOQ = √[(2 x $30 x 30,000) / $20] = √($1,800,000 / $20) = √90,000 = 300

This means that the company must make 2 orders per week and 100 orders per year. This happens because the holding costs per unit are too high, therefore, in order to reduce costs you must have a small inventory.