Use the information below to answer the following questions
Aqua Ltd has forecast the yearly demand for its product as 5,000 units. 100 units of material must be used to produce the product. The cost of placing a single order for raw materials is $20, and the cost of holding one unit of material is $0.40 a year.
-Refer to the information above. The economic order quantity for raw materials is:
A) 10,000 units.
B) 1,000 units.
C) 100 units.
D) 7,071 units.

Question

Quizplus · Accepted Answer

The Economic Order Quantity (EOQ) formula is:
EOQ = √ [(2DS)/(H)]
Where D = yearly demand, S = cost of placing one order, and H = holding cost per unit per year.
Plugging in the values given in the question, we get:
EOQ = √ [(2x5000x100)/(0.40)] = 7,071 units
Therefore, the economic order quantity for raw materials is 7,071 units. The best choice for Aqua Ltd would be to order 7,071 units of raw materials at a time to minimize the total cost of ordering and holding.

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