Question

A manager receives a forecast for next year. Demand is projected to be 590 units for the first half of the year and 940 units for the second half. The monthly holding cost is $2 per unit, and it costs an estimated $55 to process an order.
a. Assuming that monthly demand will be level during each of the six-month periods covered by the forecast (e.g., 100 per month for each of the first six months), determine an order size that will minimize the sum of ordering and carrying costs for each of the six-month periods. (Round your answers to the nearest whole number.)

Answer 1

Answer:

74 units; 93 units

Explanation:

Given that,

Holding cost, H = $2 per unit

Carrying cost, O = $55

Demand in first half, D1 = 590 units

                                       = 590 ÷ 6

                                       = 98.33 per month

Demand in second half, D2 = 940 units

                                       = 940 ÷ 6

                                       = 156.67 per month

For D1; EOQ:

$EOQ=\sqrt{\frac{2\times D\times O}{H} }$

$EOQ=\sqrt{\frac{2\times 98.33\times 55}{2} }$

               = 73.54 or 74 units

For D2; EOQ:

$EOQ=\sqrt{\frac{2\times D\times O}{H} }$

$EOQ=\sqrt{\frac{2\times 156.67\times 55}{2} }$

               = 92.82 or 93 units

Hence, the appropriate order size will be 74 units and 93 units.