Question

A company produces and sells 6,400 recliners each year. Each production run has a fixed cost of $400 and an additional cost of $35 per recliner. To store a recliner for a full year costs $8. What is the optimal number of recliners the company should make during each production run? Do not include units with your answer.

Answer 1

Economic Order Quantity (EOQ) is calculated by using the following formula

Economic Order Quantity (EOQ) = [(2 D x S) / C] ^½

Where, Annual Demand (D) = 6,400 Recliners

Fixed Ordering Cost (S) = $400

Carrying cost per recliner (C) = $8

Therefore, Economic Order Quantity (EOQ) = [(2 D x S) / C] ½

= [(2 x 6,400 x 400) / 8] ½

= [640,000] ½

= 800 Recliners

“Hence, the optimal number of recliners the company should make during each production run is 800 Recliners”