For a certain item, the cost-minimizing order quantity obtained with the basic EOQ model is 200 units, and the total annual inventory (carrying and setup) cost is $600. What is the inventory carrying cost per unit per year for this item?

Answer: $3 per unit per year

Explanation:

Using the EOQ model we will have to divide the Total Carrying Cost (Annual Inventory Carrying Cost) by the Average inventory to find the inventory carrying cost per unit per year.

First then, let us calculate the Total Annual Inventory Carrying Cost with the following formula,

Annual Inventory Carrying Cost = total annual setup or ordering cost.

Now the figure provided needs to be divided in 2 before it has both the carrying and ordering cost.

So Annual inventory carrying cost = total annual inventory / 2

= 600/2

= 300

Now to calculate the Average Inventory which is,

Average Inventory = EOQ/2

= 200/2

= 100

The Inventory Carrying Cost per unit will therefore be,

= 300 / 100

= $ 3

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