Question

1.Explain all that you know about Economic Order Quantity (i.e. Determining how much to order)? Mark Achin sells 3,600 electric motors each year. The cost of these is $200 each, and demand is constant throughout the year. The cost of placing an order is $40, while the holding cost is $20 per unit per year. There are 360 working days per year and the lead-time is 5 days. If Mark orders 200 units each time he places an order, what would his total ordering cost be for the year?

Answer 1

1.

Economic order quantity is the inventory management technique that helps to know the quantity to be ordered each time so that annual cost of inventory management is minimized. AT EOQ level of quantity ordering, sum of of annul ordering cost and holding cost will be lowest. So, this technique saves funds.

EOQ is calculated using the following formulae.

EOQ = (2*annual demand*ordering cost/holding cost per unit per year)^.5

As per the given data,

EOQ = (2*3600*40/20)^.5

EOQ = 120 units

If Mark orders 200 units each time

Total ordering cost = (3600/200)*40 = $720

Total Holding cost = (200/2)*20 = $2000

Total annual cost = 720+2000 = $2720