Question

Cheeseburger and Taco Company purchases 18,202 boxes of cheese each year. It costs $23 to place and ship each order and $4.00 per year for each box held as inventory. The company is using Economic Order Quantity model in placing the orders.

Calculate Economic Order Quantity

Answer 1

Solution:

Economic order quantity is calculated using the following formula:

= ( 2AO / C ) ^{( ½ )}

Where A = Annual usage units

O = Ordering cost per order

C = Annual carrying cost of one unit

In the given question as per the data given:

A = Annual usage units = 18,202

O = Ordering cost per order = $ 23

C = Annual Inventory carrying cost of one unit = $ 4

Thus Economic order quantity = ( ( 2* 18,202 * $ 23 ) / 4 ) ^{( ½ )}  

= ( 837,292 / 4 ) ^{( ½ )}

= (209,323 ) ^{( ½ )}

= 457.5183 ( when rounded off to four decimal places )

= 457.52 ( when rounded off to two decimal places )

= 458 orders ( when rounded off to the nearest integer )

Note: The square root of 209,323 is calculated using the following formula in excel

=SQRT(Number) = SQRT(209,323) = 457.5183