Question

Consider a hardware supply warehouse that is contractually obligated to deliver 1,000 units of sp... Consider a hardware supply warehouse that is contractually obligated to deliver 1,000 units of specialized fastener to a local manufacturing company each week. Each time the warehouse places an order for these items from its supplier, an ordering and transportation fee of $20 is charged to the warehouse. The warehouse pays $1.00 for each fastener and charges the local firm $5.00 for each fastener. Annual holding costs is 25 percent of inventory value, or $0.25 per year. The warehouse manager would like to know how much to order when inventory gets to zero. To answer this question, we can use the formula defined above. Annual demand (assuming the manufacturing plant operations for 50 weeks a year ) is 50,000 units, annual holding cost is $0.25 per unit, and fixed setup cost per unit is $20.00. Each time the warehouse places an order, the optimal order quantity is thus 2,828. Instructor requirements: Apply the economic order quantity formula to the data in Example 2-2 on Page 35 in the textbook, and reproduce the answer of 2,828 units.
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Answer 1

Answer:

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Answer 2

Answer :

The optimal order quantity for the warehouse is 2,828 units.

Explanation :

The Economic Order Quantity (EOQ) formula can be used to determine the optimal order quantity that minimizes the total cost of inventory, which is the sum of ordering, holding and shortage costs. The formula for EOQ is given as:

EOQ = √(2DS / H)

where,

D = annual demand

S = ordering cost per order

H = holding cost per unit per year

Given the data,

D = 50,000 units

S = $20

H = $0.25

Substituting the values in the EOQ formula, we get:

EOQ = √(2 × 50,000 * $20 / $0.25)

EOQ = √(200,000,000 / 0.25)

EOQ = √(800,000,000)

EOQ = 2,828 units

Hence, the optimal order quantity for the warehouse is 2,828 units.

To know more about the concept please go through the links :

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