Question

A textile manufacturer has cloth that has a $14 per yard carrying cost per year. This cloth is used at a rate of 25,000 yards per year, and ordering costs are $10 per order. 1. What is the economic order quantity for this cloth? 2. What are the annual inventory costs for this firm if it orders in this quantity? 3. What essential features of inventory management are successfully captured by the “economic order quantity” model?

Answer 1

1) Economic order quantity :-

EOQ =

here A= annual quantity needed = 25,000 yards

O = ordering cost per order = $ 10 per oder

C = annual carry cost per unit = $ 14 per yard

EOQ = = 188.98224 yards

EOQ = 189 yards per order

2) Annual inventory cost = Total ordering cost + total carrying cost

Total ordering cost =( A / EOQ ) * ordering cost per order = (25,000 / 189) * 10 = 1322.75

Total carrying cost = (EOQ /2) *carrying cost per unit per year = (189 / 2 ) * 14 =1323

Annual inventory cost = 1322.75 +1323 = $ 2645.75

3) EOQ is quantity it minimizes the Total ordeing cost anf total carrying cost.

It helps low inventory cost .

the primary purpose of EOQ is to help keep inventory carrying cost as low as posible.