Question

The Home and Garden (HG) chain of superstores imports decorative planters from Italy. Demand for the planters is stable and averages at 150/week. Each planter costs $10. HG incurs a holding cost of 30% per year to carry inventory. HG has an opportunity to set up a superstore in the Phoenix region. Each order shipped from Italy incurs a fixed transportation and delivery cost of $5000. Consider 50 weeks in the year. Suppose HG uses the economic order quantity (EOQ) model to make ordering decisions. Then the average inventory that HG carries for the year would be

Answer 1

Answer:

The average inventory which HG should carry during the year is 5,000 units.

Explanation:

Economic Order Quantity is the ideal inventory procurement which minimizes holding and ordering cost. The EOQ is used by businesses in order to determine the best possible inventory holding.

EOQ = $\sqrt{\frac{2*Annual Demand * Ordering Cost}{Annual Holding Cost} }$

EOQ = $\sqrt\frac{2*7,500*5,000}{10*0.3}$

EOQ = 5,000 units