Massa Machine Tools expects total sales of $12,000. The price per unit is $6. The firm estimates an ordering cost of $9.96 per order, with an inventory cost of $.84 per unit. What is the optimum order size

Optimal order quantity = 217.781 units

Explanation:

Optimal order quantity is also called economic order quantity is the most cost-effective level of a product that can be manufactured at a certain time. Calculating optimal order quantity is important as it minimises excess stock of products and associated costs of storing excess.

Optimal order quantity = √{2 * (Annual usage per unit * Setup cost) / (Annual carrying cost per unit)

Annual usage per unit = 12,000/6 = $2,000

Optimal order quantity = √2 * (2,000*9.96) / 0.84

Optimal order quantity = √47,428.57

Optimal order quantity = 217.781 units