For a given product, the order placement cost is $5, the holding cost per unit per year is $10, and annual demand is 1,600 units. If the EOQ is used, total annual logistics costs will amount to which of the following?
A) $100
B) $200
C) $400
D) $800
E) None of these

Question

Quizplus · Accepted Answer

The Economic Order Quantity (EOQ) formula is used to minimize total logistics costs, which include order placement and holding costs. The EOQ is calculated as √((2 * Demand * Order Cost) / Holding Cost). For this problem, EOQ = √((2 * 1600 * 5) / 10) = √1600 = 40 units. The total annual logistics cost is the sum of the annual order cost and the annual holding cost. Annual order cost = (Demand / EOQ) * Order Cost = (1600 / 40) * 5 = $200. Annual holding cost = (EOQ / 2) * Holding Cost = (40 / 2) * 10 = $200. Total logistics cost = $200 + $200 = $400.

For a Given Product, the Order Placement Cost Is $5