Answer:
Answer:
Total cost = Total ordering cost + Total holding cost
Total cost = DCo/Q + QH/2
Where D = Annual demand, Co = Ordering cost per order and H = holding cost per item per annum.
For 25 Order Size
Total cost = 1,220 x $26/25 + 25 x $25/2
Total cost = $1,268.80 + $312.50 = $1,581.30
For 40 Order Size
Total cost = 1,220 x $26/40 + 40 x $25/2
Total cost = $793 + $500 = $1,293.00
For 50 Order Size
Total cost = 1,220 x $26/50 + 50 x $25/2
Total cost = $634.40 + $625 = $1,259.40
For 60 Order Size
Total cost = 1,220 x $26/60 + 60 x $25/2
Total cost = $528.67 + $750 = $1,278.67
For 100 Order Size
Total cost = 1,220 x $26/100 + 100 x $25/2
Total cost = $317.20 + $1,250 = $1,567.20
b. The economic order quantity is 50 units because it reduces the total cost to $1,259.40
Explanation:
In this case, we need to determine the total costs based on different order sizes. Thus, economic order quantity is the order size that minimises the total cost.
