For a certain group of items the cost of carrying inventory and the cost of placing orders is not exactly known but is about the same for all the items. The company has calculated K = 20 for these items. If one item has an annual demand (A) = $10,000 the NEW order quantity should be:
A) $2,000
B) $10,000
C) $20,000
D) $50,000
E) none of the above

Question

Quizplus · Accepted Answer

The EOQ formula is: EOQ = sqrt((2*A*K)/H)where:A = annual demandK = cost of placing an orderH = cost of carrying inventoryIn this case, we are given that K = 20 and A = 10,000. We do not know the value of H, but we are told that it is about the same for all items in this group. Therefore, we can assume that H is a constant.Plugging in the values we know, we get:EOQ = sqrt((2*10,000*20)/H)EOQ = sqrt(400,000/H)Since H is a constant, we can see that the EOQ is inversely proportional to the square root of H. Therefore, the EOQ will be larger for smaller values of H.In this case, we are not given a specific value for H, but we are told that it is about the same for all items in this group. Therefore, we can assume that H is relatively small. This means that the EOQ will be relatively large.Of the choices given, the only one that is larger than 10,000 is A) $2,000. Therefore, the correct answer is A.

For a Certain Group of Items the Cost of Carrying