Annual demand for a product is 40,000 units. The product is used at a constant rate over the 365 days the company is open every year. The annual holding cost for the product is estimated to be $2.50 per unit, and the cost of placing each order is $125.00. If the company orders according to the economic order quantity (EOQ) formula, then the time between orders (order cycle time) is

Question

Tania Calhoun

Business

14 July, 01:30

Annual demand for a product is 40,000 units. The product is used at a constant rate over the 365 days the company is open every year. The annual holding cost for the product is estimated to be $2.50 per unit, and the cost of placing each order is $125.00. If the company orders according to the economic order quantity (EOQ) formula, then the time between orders (order cycle time) is

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Vinnie · Answer 1

Order cycle time = 28.85 days

Explanation:

The Economic Order Quantity (EOQ) is the order size that minimizes the balance of ordering cost and holding cost. At the EOQ, the carrying cost is equal to the holding cost.

It is computed using he formula below

EOQ = √ (2 * Co * D) / Ch

Co - ordering cost, Ch - Holding cost per unit per annum

D - Annual demand,

EOQ - Economic order qunatity

Co-125. Ch - 2.50, D - 40,000

EOQ = √ (2 * 125 * 40,000) / 2.5

EOQ = 3,162.27

The cycle time = order quantity/annual demand * 365 days

= 28.85 days