Broadbent Industries carries a part that is popular in the manufacture of automatic sprayers. Demand for this part is 4,000 units per year; order costs amount to $30 per order, and holding costs total $1.50 per unit. The company is considering the implementation of an economic order quantity model in an effort to better manage its inventories.
Required:
A. Compute the economic order quantity.
B. Compute total annual inventory costs if Broadbent follows the EOQ policy.

Question

Broadbent Industries carries a part that is popular in the manufacture of automatic sprayers. Demand for this part is 4,000 units per year; order costs amount to $30 per order, and holding costs total $1.50 per unit. The company is considering the implementation of an economic order quantity model in an effort to better manage its inventories.
Required: 
A. Compute the economic order quantity.
B. Compute total annual inventory costs if Broadbent follows the EOQ policy.

Quizplus · Accepted Answer

The Answer is A. The EOQ can be figured by taking the square root of: (2 x annual requirement x cost per order) / annual holding cost per unit. The square root of (2 x 4,000 x $30) /$1.50, or 160,000, is 400.
B. The ordering cost is based on 10 orders (4,000 units / 400 units) x $30, and totals $300; the holding cost is computed on the company's average inventory of 200 units (400 / 2) and amounts to $300 (200 x $1.50). Thus, costs at the EOQ total $600 ($300 + $300).

Broadbent Industries Carries a Part That Is Popular in the Manufacture