A firm desires to control inventory levels so as to minimize the sum of holding and order costs. It costs the firm $20 to place an order. The firm estimates its inventory carrying costs at $2/unit/year. Weekly demand is 100 units and there are 50 weeks in the work year. The item costs $10 per unit. Leadtime for the product is 5 weeks. 32. What quantity of items should the firm order each time so as to minimize total inventory costs

Question

Business

Richard Caldwell

13 December, 01:24

A firm desires to control inventory levels so as to minimize the sum of holding and order costs. It costs the firm $20 to place an order. The firm estimates its inventory carrying costs at $2/unit/year. Weekly demand is 100 units and there are 50 weeks in the work year. The item costs $10 per unit. Leadtime for the product is 5 weeks. 32. What quantity of items should the firm order each time so as to minimize total inventory costs

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Elaine Adkins · Answer 1

Quantity to minimize total inventory cost = 316.23 units

Explanation:

The Economic Order Quantity (EOQ) is the order size that minimizes the balance of ordering cost and holding cost. At the EOQ, the carrying cost is equal to the holding cost.

It is computed using the formulae below

EOQ = √ (2 * Co * D) / Ch

Co - Ordering cost, Ch - Carrying cost - D - Annual demand

Co - 20, Ch - 2, D - 5,000

Annual demand = 100 * 50 = 5000

EOQ = √ (2*20 * 5000) / 2 = 316.227766

Quantity to minimize total inventory cost = 316.23 units