Question

The economic order quantity (EOQ) of Dennis Co.’s only product is 100 units per month. When developing the budget for the next year, the CFO estimated that the annual demand for the product will increase by 3,000 units, but the cost per order and the carrying cost per inventory unit will remain unchanged at $30 and $15, respectively. What is the estimated annual demand for the next year?

Answer 1

Answer:

5,500 units

Explanation:

Use the economic order quantity (EOQ) formula to calculate the estimated annual demand

EOQ = $\sqrt{\frac{2DS}{H} }$

Where

EOQ = 100 units

S = Oerdering cost = $30

H = Carrying cost per unit = $15

D = Annua Demand = ?

Placing values in the formula

100 units = $\sqrt{\frac{2D (30) }{15} }$

Taking Square on both sides

$100^{2}$ = $(\sqrt{\frac{2D (30) }{15} })^{2}$

10,000 = $\frac{2D (30) }{15} }$

10,000 = $\frac{60D }{15} }$

10,000 = 4D

D = 10,000 / 4

D = 2,500 units

Now calculate the estimated annual demand

Estimated annual demand = Annual Demand + Expected Increase in next month = 2,500 units + 3,000 units = 5,500 units