The current lot size of 235 is too large.
We use the given data to find the Economic Order Quantity or EOQ and then compare it to the lot size of 235.
Economic Order Quantity is used to arrive at the optimum purchase order for goods (in number of units) while minimizing ordering and handling costs.
The formula for calculating EOQ is:
Q = ,
where :
Q is the order lot in number of units
D is the annual demand for the product
S is ordering cost per order (in $)
H is holding cost per unit (in $)
We can arrive at the annual demand for the product as follows:
Annual Demand = No. of units sold per week * No. of weeks the store operates
Annual Demand = 50*52 = 2600 units
Order cost = $20
Holding Cost = Holding Cost (in %) * Selling Price
Holding Cost = 20%*$40 = $8
Substituting the above values in the EOQ formula, we get,
Q = = 114.02 units.
Comparing the EOQ we just calculated and the given lot size, we arrive at the answer above.
