A company annually consumes 10,000 units of Part C.The carrying cost of this part is $2 per year and the ordering costs are $100.The company uses an order quantity of 500 units.By how much could the company reduce its total costs if it purchased the economic order quantity instead of 500 units?
A)$500
B)$2,000
C)$2,500
D)$0

Question

Quizplus · Accepted Answer

The Economic Order Quantity (EOQ) minimizes the total cost, which includes both ordering and carrying costs. The EOQ formula is sqrt((2DS)/H), where D is demand (10,000 units), S is ordering cost ($100), and H is carrying cost ($2). Calculating EOQ gives 1,000 units. The current order quantity is 500 units. By switching to EOQ, the company reduces the number of orders and carrying costs, saving $500.

A Company Annually Consumes 10,000 Units of Part C