Question

Show the total cost expression and calculate the EOQ for an item with holding cost rate 18%, unit cost $8.00, annual demand of 40000, and ordering cost of $48.

Answer 1

Answer:

Total cost = Total ordering cost + Total holding cost

Total cost = DCo     + QH

                     Q              2

Where

D = Annual demand

Co = Ordering cost per order

Q = EOQ

H = Holding cost per item per annum

D = 40,000 units

Co = $48

H = 18% x $8.00 = $1.44

EOQ = √2DCo

                H

EOQ = √2 x 40,000 x $48

                     $1.44

EOQ = 1,633 units

Explanation:

EOQ equals 2 multiplied by annual demand and ordering cost divided by holding cost per item per annum. The holding cost per item per annum is calculated as holding cost rate multiplied by unit cost.

Answer 2

The total cost expression is :

Total cost = Total ordering cost + Total holding cost

The economic order quantity (EOQ) is  1,633 units

What is economic order quantity?

Economic order quantity (EOQ), refers to the optimum amount of an item that should be ordered at any given point in time, such that the total  annual cost of carrying and ordering that item is minimized.

Total cost = DCo / Q     + QH / 2

                                 

Where

D = Annual demand

Co = Ordering cost per order

Q = EOQ

H = Holding cost per item per annum

D = 40,000 units

Co = $48

H = 18% x $8.00 = $1.44

But,

EOQ = √2DCo

EOQ = √2 x 40,000 x $48 / $1.44

EOQ = 1,633 units

Hence, the economic order quantity (EOQ) is 1,633 units

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