Item X is a standard item stocked in a company's inventory of component parts. Each year the firm, on a random basis, uses about 1,600 of item X, which costs $25 each. Storage costs, which include insurance and cost of capital, amount to $8 per unit of average inventory. Every time an order is placed for more of item X, it costs $16.

Question

Brianna Dawson

Business

9 September, 16:31

Item X is a standard item stocked in a company's inventory of component parts. Each year the firm, on a random basis, uses about 1,600 of item X, which costs $25 each. Storage costs, which include insurance and cost of capital, amount to $8 per unit of average inventory. Every time an order is placed for more of item X, it costs $16.

+2

Answers (1)

Know the Answer?

Maleah Pruitt · Answer 1

Annual demand (D) = 1,600 units

Ordering cost per order (Co) = $16

Holding cost per item per annum (H) = $8

EOQ = √2Dco

H

EOQ = √2 x 1,600 x $16

$8

EOQ = 80 units

Explanation:

EOQ is the square root of 2 multiplied by annual demand and ordering cost per order divided by holding cost per item per annum.