Question

A firm that makes electronic circuits has been optimally ordering a certain raw material 250 ounces at a time. The firm estimates that carrying cost is I = 30% per year, and that ordering cost is about $20 per order. The current price of the ingredient is $200 per ounce. The assumptions of the basic EOQ model are thought to apply.For what value of annual demand is their action optimal?

Answer 1

Answer:

93,750 ounces

Explanation:

Economic order quantity is the quantity at which business incur minimum cost. This is the level of order where the holding cost equals to the ordering cost of the business.

As per given data

Annual Demand = ?

Ordering cost = $20

Carrying cost = $200 x 30% = $60

Order Level = 250 ounces

Considering 250 ounces as optimal order, we will place the values in the formula to calculate the annual demand

EOQ =  $\sqrt{\frac{2 X S X D}{H} }$

250 =$\sqrt{\frac{2 X 20 X D}{60} }$

Taking Square of both side

250 x 250 = 40 x D / 60

62,500 = 40 x D / 60

62,500 x 60 / 40 = D

D = 93,750

Answer 2

Answer:

In the following situation:

A firm that makes electronic circuits has been optimally ordering a certain raw material 250 ounces at a time. The firm estimates that the carrying cost is I = 30% per year and that ordering cost is about $20 per order. The current price of the ingredient is $200 per ounce.

The value of annual demand for the action optimal is:

93,750.

Explanation:

To understand this answer we need to understand first a few things. First, an Economic Order Quantity is a concept in inventory management that represents the order quantity that reduces at is last point the holding and ordering costs. The formula to calculate it is:

The square root of [( two times the annual demand in units times the incremental cost to process an order) Divided by (the incremental annual cost to carry one unit in inventory)]