Question

DiskSan has to order flash transistors ($5 each) to create USB flash memory drives. Their monthly demand is 10,000 units, their holding cost (which is mostly comprised of obsolescence costs) is 10% per month per dollar in inventory, and the setup costs for an order is $5 (mostly paperwork etc.). Determine the economic order quantity for these flash transistors.

Answer 1

Answer

Economic order quantity will be 447.21

Explanation:

We have given monthly demand = 10000 units

We know that 1 year = 12 month

So Annual demand (D) = monthly demand × 12 months = 10000 × 12 = 120000 units

Cost of transistor = $5 per unit

Monthly Holding cost = 10% of cost = 10% of $5 = $0.50

So annual holding cost (H) = monthly holding cost × 12 = $0.50 × 12 = $6

Setup cost(S) = $5

We know that economic order quantity is given by

Economic order quantity = $\sqrt{\frac{2DS}{H}}=\sqrt{\frac{2\times 12000\times 5}{6}}=447.21$