Question

A large distributor of oil-well drilling equipment operated over the past two years with EOQ policies based on an annual holding cost rate of 22%. Under the EOQ policy, a particular product has been ordered with a Q* = 80. A recent evaluation of holding costs shows that because of an increase in the interest rate associated with bank loans, the annual holding cost rate should be 27%.

a. What is the new economic order quantity for the product?

b. Develop a general expression showing how the economic order quantity changes when the annual holding cost rate is changed from I to I^'.

Answer 1