Question

11) A company knows that they will sell 80,000 cases of #2 Pencils at a steady rate over the course of the next year. It costs them $12 a year to warehouse each case, based on the average number of cases in the warehouse, and it costs them $100 each time a delivery is made to their warehouse. How many orders should they place each year in order to minimize their total inventory costs? Assume that the orders are all of equal size. Round your answer to the nearest whole number

Answer 1

Answer:

139 units

Explanation:

In order to compute the number of orders place each year so that it can minimize the total inventory cost we need to use the economic order quantity formula i.e shown below:

The computation of the economic order quantity is shown below:

$= \sqrt{\frac{2\times \text{Annual demand}\times \text{Ordering cost}}{\text{Carrying cost}}}$

where,

Annual demand = 80,000 cases

Ordering cost = $12

And, the carrying cost = $100

Now placing these values to the above formula

So, the economic order quantity is

$= \sqrt{\frac{2\times \text{80,000}\times \text{\ 12}}{\text{\ 100}}}$

= 139 units