A company has steady annual demand of 4,000 units.Ordering costs £250 per order.The holding cost is £8 per unit per year.
Using the Economic Order Quantity,what is the optimum order quantity for the company,and how many orders should be placed per year?
Formula: $$E O Q = \sqrt { \frac { 2 C _ { O } D } { C _ { H } } }$$
A) Order 4,000 units at a time, with a total of 1 order per year
B) Order 16 units at a time, with a total of 250 orders per year
C) Order 500 units at a time, with a total of 8 orders in the year
D) Impossible to calculate, since we do not know cost per unit

Question

Quizplus · Accepted Answer

Using the Economic Order Quantity formula:
EOQ = sqrt((2*annual demand*ordering cost)/holding cost)
EOQ = sqrt((2*4,000*250)/8)
EOQ = 500

Therefore, the optimum order quantity is 500 units, and the number of orders per year would be:
Annual demand / EOQ = 4,000 / 500 = 8 orders per year.

Option A is incorrect because ordering 4,000 units at once will result in high holding costs.
Option B is incorrect because ordering only 16 units at a time will lead to a high number of orders and high ordering costs.
Option D is incorrect because we can calculate the optimal order quantity without knowing the cost per unit.

A Company Has Steady Annual Demand of 4,000 Units EOQ=2CODCHE O Q = \sqrt { \frac { 2 C _ { O } D } { C _ { H } } }EOQ=CH​2CO​D​​

A Company Has Steady Annual Demand of 4,000 Units $E O Q = \sqrt { \frac { 2 C _ { O } D } { C _ { H } } }$