Question

Estimated requirement for the year is 600 units. Cost per unit is Rs.20, ordering cost (per order) is Rs.12, carrying cost (20% of average inventory). What is the Economic Order Quantity (EOQ)?

(a) 150 units
(b) 200 units
(c) 300 units
(d) 400 units

Answer 1

The Economic Order Quantity (EOQ) is calculated using the formula EOQ = sqrt((2DS)/H), resulting in approximately 85 units for the given parameters of requirement, ordering cost, and carrying cost.

Step-by-step explanation:

To calculate the Economic Order Quantity (EOQ), we can apply the EOQ formula, which is derived from the balance between ordering costs and carrying costs. The formula is: EOQ = sqrt((2DS)/H), where D is the demand in units for a period, S is the ordering cost per order, and H is the holding or carrying cost per unit per period.

In this case, the estimated requirement (D) is 600 units per year, the ordering cost (S) is Rs.12 per order, and the carrying cost (H) is 20% of the cost per unit, which is 20% of Rs.20, coming out to Rs.4 per unit. Plugging these numbers into the formula, we have EOQ = sqrt((2*600*12)/4), which simplifies to EOQ = sqrt(7200) = 84.85. Rounding to the nearest whole number, the EOQ is approximately 85 units. The student's answer of 400 units does not match this calculation; therefore, it may be based on incorrect assumptions or calculation errors.