Question

Ken Ramsing has been in the lumber business for most of his life. Ken’s biggest competitor is Pacific Woods. Through many years of experience, Ken knows that the ordering cost for an order of plywood is $25 and that the carrying cost is 25% of the unit cost. Both Ken and Pacific Woods receive plywood in loads that cost $100 per load. Furthermore, Ken and Pacific Woods use the same supplier of ply- wood, and Ken was able to find out that Pacific Woods orders in quantities of 4,000 loads at a time. Ken also knows that 4,000 loads is the EOQ for Pacific Woods. What is the annual demand in loads of plywood for Pacific Woods?

Answer 1

Answer: 8,000,000

Explanation:

Given the following :

EOQ = 4000

Ordering cost (S) = $25

Carrying cost = 25% of unit cost

Cost per load = $100

Let annual demand = D

EOQ = sqrt[ ( 2 * S * D) / H]

Holding cost = H = 0.25 × $100 = $25

Hence,

4000 = sqrt[ ( 2 * 25 * D) / 25]

4000 = (50D /25)^1/2

Square both sides

4000² = 50D / 25

16,000,000 × 25 = 50D

400000000 = 50D

D = 400000000 / 50

D = 8,000,000

Hence, annual demand = 8,000,000