Question

William Beville’s computer training school, in Richmond, stocks workbooks with the following characteristics:

Demand D = 19,500 units/year

Ordering cost S = $25/order

Holding cost H = $4/unit/year

a) Calculate the EOQ for the workbooks.
b) What are the annual holding costs for the workbooks?
c) What are the annual ordering costs?

Answer 1

(a) 494 units

(b) $988

(c) $1,000

Step-by-step explanation:

Demand (D) = 19,500 units/year

Ordering cost (S) = $25/order

Holding cost (H) = $4/unit/year

a) The EOQ is given by the following relationship:

`EOQ =\sqrt{(2*D*S)/(H) } \\EOQ= \sqrt{(2*19,500*25)/(4)} \\\\EOQ= 493.7`

The EOQ, rounded to the nearest whole unit, is 494

b) Annual holding costs are given by:

`C_(hold) = (EOQ)/(2)*H\\C_(hold) = (494)/(2)*4 \\C_(hold) = \$988`

c) Annual ordering costs are defined by the number of orders required multiplied by the cost per order:

`Cost_(order) = N*S \\N= (19,500)/(494)\ \ \ \ *round\ to\ next\ whole\ number\\N=40\\Cost_(order) = 40*25\\Cost_(order) = \$1,000`