Question

Henry​ Crouch's law office has traditionally ordered ink refills 70 units at a time. The firm estimates that carrying cost is 40​% of the ​$11 unit cost and that annual demand is about 245 units per year. The assumptions of the basic EOQ model are thought to apply. For what value of ordering cost would its action be​ optimal? ​a) For what value of ordering cost would its action be​ optimal? Its action would be optimal given an ordering cost of ​$ nothing per order ​(round your response to two decimal​ places). ​b) If the true ordering cost turns out to be much less than your answer to part​ (a), what is the impact on the​ firm's ordering​ policy?

Answer 1

Answer:

a. 49.50 units

b. The order quantity should not be changed

Explanation:

a. The computation of the ordering cost is shown below:

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

where,

Carrying cost = $11 × 40% = $4.4

And, the other items values would remain the same

Now put these values to the above formula  

So, the units would equal to

70 = $\sqrt{\frac{2\times \text{245}\times \text{ordering cost}}{\text{\ 4.40}}}$

= 49.50 units

b. Since we see that the ordering cost is less than the economic order quantity, the order quantity should not be changed as it leads to increase in the total inventory cost