Question

Firm A’s demand for a product is 15 units per month. Its supplier charges an ordering cost of $5 per order and $10 per unit with a 10% discount for orders of 15 units or higher. Firm A incurs a 25% annual holding cost. What is Firm A’s annual ordering costs if it orders at a quantity of 28 units? $30.00

Answer 1

Answer:

$980

Explanation:

Formula for Economic Order Quantity

Q = square root of (2*Annual demand* Order Cost)/Holding Cost

Where Q = Economic order quantity, which is 28 in our question.

28 = square root of (2* (15 units per month *12 months)* Order cost)/0.25*

28 = square root of 2*180*order cost/0.25

28 = square root of 360*order cost/0.25* (180 units *$10 per unit)

28= square root of  360* order cost/450 .

Square both sides

784 =  360* order cost/450

Multiply both sides by 450

352,800 = 360* Order cost

Hence order cost  = 352800/360 = $980