Question

Company A purchases cases of fertilizer for its lawn-care business from a supplier who charges $30 per order and $50 per case. Each case consists of five bags of fertilizer. Company A needs 2,000 bags of fertilizer a year. Company A’s annual holding costs are 30%. If Company A only has room to hold 25 cases of fertilizer, how many cases should Company A order each time to minimize the total holding and ordering cost?

Answer 1

EOQ = √2DS/H

Annual demand = 2000 bags/5 = 400 cases

Order cost = $030

Holding cost = 50*0.30 = $15

EOQ = √2*400*30/15

EOQ = √1600

EOQ = 40

The Economic order quantity = 40. In order to minimize the total cost, the company should order 40 units. However, since Company A only has room to hold 25 cases of fertilizer, therefore, it should order 25 cases each time.