Carter Company orders 250 units at a time, and places 15 orders per year. Total ordering cost is $1,100 and total carrying cost is $1,750. Which of the following statements is true?
A) The economic order quantity (EOQ) is 250.
B) The economic order quantity (EOQ) is more than 250.
C) The economic order quantity (EOQ) is less than 250.
D) Total inventory-related cost is lower than it would be at the economic order quantity (EOQ).
E) None of these.

Question

Quizplus · Accepted Answer

We can use the EOQ formula to find the optimal order quantity:
EOQ = sqrt((2DS)/H)
Where:
D = annual demand = (250 x 15) = 3750
S = ordering cost per order = $1,100
H = carrying cost per unit per year = $1,750/3750 = $0.47

Plugging in the values, we get:
EOQ = sqrt((2 x 3750 x 1100)/0.47) = 763.96

Since the nearest feasible order size is 250, the company should continue ordering in batches of 250. However, the current order quantity is not optimal and results in higher total inventory-related cost than it would be at the EOQ.

Carter Company Orders 250 Units at a Time, and Places