Question

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 2,000 of item X, which costs $25 each. Storage costs, which include insurance and cost of capital, amount to $5 per unit of average inventory. Every time an order is placed for more of item X, it costs $10. a. Whenever item X is ordered, what should the order size be? b. What is the annual cost for ordering item X? c. What is the annual cost for storing item X?

Answer 1

Answer:

Step 1 of 3

a.

The Quantity to be ordered, Qopt is the optimum quantity that should be ordered normally termed as Economic Order Quantity (EOQ).

It is calculated as:



Where, D is the annual demand, S is the ordering or set up cost and H is holding cost.