Suppose that the cost of holding one item in inventory is Rs. 0.50 and that of placing an order is Rs. 100. Also assume that the annual demand for the item is 4,900 units. Find the economic order quantity.
Answers
Given:
Suppose that the cost of holding one item in inventory is Rs. 0.50 and that of placing an order is Rs. 100. Also assume that the annual demand for the item is 4,900 units.
To find:
Find the economic order quantity.
Solution:
From given, we have,
The cost of holding one item in inventory is Rs. 0.50 and that of placing an order is Rs. 100.
The annual demand for the item is 4,900 units.
EOQ = √(2 × D × S / H)
where,
EOQ represents the economic quantity
D represents demand, or how many units of a product you need to buy. = 4900 units
S represents setup cost. = Rs. 100
H represents the holding fee or storage cost per unit of product. = Rs. 0.50
substituting the values in the above equation, we get,
EOQ = √(2 × D × S / H)
EOQ = √(2 × 4900 × 100 / 0.50)
EOQ = 1400 units.
Therefore, the economic order quantity is 1400 units