Question

A Company estimates its ordering cost at $90 per order and carrying cost at 15%. The estimated annual requirement is 480,000 units at a price of $40 per unit. 1. Using EOQ, calculate the economical number of units to order.

Answer 1

The economical order quantity (EOQ) for the company is approximately 3,795 units. This is calculated using the EOQ formula with the annual requirement of 480,000 units, ordering cost of $90, and carrying cost at 15% of the unit cost.

Step-by-step explanation:

To calculate the economical number of units to order using the Economic Order Quantity (EOQ) formula, we must identify and use the relevant cost factors from the scenario provided. The EOQ formula is defined as √((2DS)/H), where D represents the demand (annual requirement), S is the ordering cost per order, and H is the carrying cost per unit, per year.

In this case, the annual requirement (D) is 480,000 units, the ordering cost (S) is $90 per order, and the carrying cost (H) is 15% of the cost per unit. Since the price per unit is $40, we calculate the carrying cost per unit as 15% of $40, which is $6 per unit.

Now we simply plug these numbers into the EOQ formula:

• D (Annual requirement): 480,000 units
• S (Ordering cost): $90 per order
• H (Carrying cost per unit): $6 per unit (15% of $40)

EOQ = √((2 * 480,000 * 90) / 6)

EOQ = √(86,400,000 / 6)

EOQ = √14,400,000

EOQ = 3,794.73 units

The economical order quantity is therefore approximately 3,795 units (rounded to the nearest whole unit).