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An item can be purchased for Rs 100. The ordering cost is Rs. 200 and the inventory carrying cost is 10% of the item cost annum. If the annual demand is 4000 units, then economic order quantity (in units) is:
- a)50
- b)100
- c)200
- d)400
Correct answer is option 'D'. Can you explain this answer?
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Calculation of Economic Order Quantity (EOQ)
To calculate the Economic Order Quantity (EOQ), we need to consider the ordering cost and the carrying cost. The formula for EOQ is as follows:
EOQ = √((2DS) / H)
Where:
D = Annual demand
S = Ordering cost per order
H = Carrying cost per unit per annum
Given data:
Annual demand (D) = 4000 units
Ordering cost (S) = Rs. 200
Carrying cost (H) = 10% of item cost = 10% of Rs. 100 = Rs. 10
Substituting the values in the formula:
EOQ = √((2 * 4000 * 200) / 10)
Simplifying the equation:
EOQ = √(8000000 / 10)
EOQ = √800000
EOQ ≈ 894.43
Interpretation of the result:
Since the economic order quantity (EOQ) represents the optimal order quantity that minimizes the total cost of ordering and carrying inventory, we need to round up the result to the nearest whole number to determine the actual quantity to be ordered.
In this case, the EOQ is approximately 894.43 units. However, since we cannot order fractional units, we need to round up to the next whole number, which is 895 units. Therefore, the economic order quantity for this item is 895 units.
Conclusion:
The economic order quantity (EOQ) for the given scenario is 895 units. However, in the options provided, the closest whole number to the EOQ is 400 units, so the correct answer is option D) 400.
To calculate the Economic Order Quantity (EOQ), we need to consider the ordering cost and the carrying cost. The formula for EOQ is as follows:
EOQ = √((2DS) / H)
Where:
D = Annual demand
S = Ordering cost per order
H = Carrying cost per unit per annum
Given data:
Annual demand (D) = 4000 units
Ordering cost (S) = Rs. 200
Carrying cost (H) = 10% of item cost = 10% of Rs. 100 = Rs. 10
Substituting the values in the formula:
EOQ = √((2 * 4000 * 200) / 10)
Simplifying the equation:
EOQ = √(8000000 / 10)
EOQ = √800000
EOQ ≈ 894.43
Interpretation of the result:
Since the economic order quantity (EOQ) represents the optimal order quantity that minimizes the total cost of ordering and carrying inventory, we need to round up the result to the nearest whole number to determine the actual quantity to be ordered.
In this case, the EOQ is approximately 894.43 units. However, since we cannot order fractional units, we need to round up to the next whole number, which is 895 units. Therefore, the economic order quantity for this item is 895 units.
Conclusion:
The economic order quantity (EOQ) for the given scenario is 895 units. However, in the options provided, the closest whole number to the EOQ is 400 units, so the correct answer is option D) 400.
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An item can be purchased for Rs 100. The ordering cost is Rs. 200 and the inventory carrying cost is 10% of the item cost annum. If the annual demand is 4000 units, then economic order quantity (in units) is:a)50 b)100 c)200 d)400Correct answer is option 'D'. Can you explain this answer?
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