Question

Suppose that a company needs 1,500,000 items during a year and that preparation for each production run costs $900. Suppose also that it costs $29 to produce each item and $3 per year to store an item. Use the inventory cost model to find the number of items in each production run so that the total costs of production and storage are minimized.

Answer 1

Answer:

30,000 units

Explanation:

we can use the economic order quantity formula:

EOQ = √(2SD/H)

where:

• S = order cost (per purchase order) ≈ production run cost = $900
• D = demand in units (annual basis) ≈ production requirement = 1,500,000 units
• H = holding costs (per unit, per year) = $3 per item, per year

EOQ = √[(2 x $900 x 1,500,000) / $3] = 30,000 units