A stainless steel knife set is one item it stocks. Demand (2,400 sets per year) is relatively stable over the entire year. Whenever new stock is ordered, a buyer must ensure that numbers are correct for stock on-hand and then phone in a new order. The total cost involved to place an order is about $5. RW figures that holding inventory in stock and paying for interest on borrowed capital, insurance, and so on, add up to about $4 holding cost per unit per year. Analysis of the past data shows that the standard deviation of demand from retailers is about four units per day for a 365-day year. Lead time to get the order is seven days. What is the economic order quantity?

Question

Eileen Knapp

Business

14 February, 02:39

A stainless steel knife set is one item it stocks. Demand (2,400 sets per year) is relatively stable over the entire year. Whenever new stock is ordered, a buyer must ensure that numbers are correct for stock on-hand and then phone in a new order. The total cost involved to place an order is about $5. RW figures that holding inventory in stock and paying for interest on borrowed capital, insurance, and so on, add up to about $4 holding cost per unit per year. Analysis of the past data shows that the standard deviation of demand from retailers is about four units per day for a 365-day year. Lead time to get the order is seven days. What is the economic order quantity?

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Answers (1)

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Kathy Singh · Answer 1

Annual demand (D) = 2,400 sets

Holding cost (H) = $4

Ordering cost (Co) = $5

EOQ = √2 x 2,400 x $5

$4

EOQ = 77 units

Explanation:

Economic order quantity (EOQ) is the square root of 2 multiplied by annual demand and ordering cost per order divided by the holding cost per item per annum. EOQ is the quantity of stock that is bought each time a replenishment order is placed.