Question

A mail-order house uses 18,000 boxes a year. Carrying costs are 60 cents per box a year, and ordering costs are $96. The following price schedule applies. Determine: a. The optimal order quantity. b. The number of orders per year.

Answer 1

Hie, the price schedule is missing from your question however the important principles are explained below.

a. The optimal order quantity

Optimum order quantity is the order level that results in minimum ordering costs and holding costs.

Optimum order quantity = √ (2 × Annual Demand × Cost per order) / holding cost per unit

b. The number of orders per year.

orders per year = Annual Demand / optimal order quantity

This calculates the number of orders to be placed during the year at the optimum order quantity.