Question

Rajesh Indian Market (RIM) is open 12 months out of the year. At RIM, the demand for rice is very consistent 200 pounds per month. RIM orders the rice from a distributor in India at an ordering cost of $50 per order. Rice costs $5 per pound, and annual carrying charge is 15%.
The EOQ is?
a. 566 pounds
b. 164 pounds
c. 163 pounds
d. 26667 pounds

Answer 1

Answer:

A. 566 pounds

Explanation:

Given: Demand for rice is very consistent= 200 pounds per month.

           Cost of rice per order= $50 per order.

           Rice cost= $5 per pound.

           Carrying charge= 15%

EOQ: Economic order quantity (EOQ) is the number of units that company should include in their inventory with each order to reduce cost of inventory.

Now, calculating EOQ.

Formula; EOQ= $\sqrt{\frac{2DP}{C} }$

D= Demand in units for specified period.

P= relevant ordering costs per order.

C= Relevant carrying cost of one unit in stock for the time period used for D.

EOQ= $\sqrt{\frac{2\times (50)(200\times 12)}{5\times 15\%} }$

⇒ EOQ= $\sqrt{\frac{2(50)(2400)}{5\times (0.15)} }$

Opening parenthesis

⇒ EOQ=  $\sqrt{\frac{240000}{0.75} }$

⇒ EOQ= $\sqrt{320000}$

∴ EOQ= $565.68\ pound \approx 566\ pounds$

Hence, Economic order quantity is 566 pounds.