Calculation of EOQ

EOQ stands for "Economic Order Quantity." It is a formula that calculates the optimal quantity of goods a company should order to minimize the total cost of ordering and holding inventory. The EOQ formula takes into account the cost of placing an order, the cost of holding inventory, and the demand for the product.

Formula: EOQ = sqrt(2DS/H)

where D = annual demand, S = ordering cost, H = holding cost per unit

Given:

Annual demand (D) = 2400 units
Unit price = $2.40
Ordering cost (S) = $4.00
Storage cost (H) = 2% of unit price = $0.048 per unit
Interest rate = 10%
Lead time = 0.5 month

Calculation:

H = 2% of $2.40 = $0.048 per unit

Lead time = 0.5 month = 0.5 x 12 = 6 months

Plugging the values in the formula, we get:

EOQ = sqrt(2 x 2400 x 4 / 0.048) = 800 units

Explanation

Annual demand: It is the total quantity of the product that a company expects to sell in a year.

Unit price: It is the price of one unit of the product.

Ordering cost: It is the cost of placing an order for the product. It includes the cost of preparing the purchase order, receiving the goods, and inspecting them.

Storage cost: It is the cost of holding inventory. It includes the cost of storing the goods, insurance, and the opportunity cost of tying up capital in inventory.

Interest rate: It is the rate at which the company borrows money to finance its operations. It is used to calculate the opportunity cost of tying up capital in inventory.

Lead time: It is the time it takes for the supplier to deliver the goods after the company places an order.

EOQ: It is the optimal quantity of goods a company should order to minimize the total cost of ordering and holding inventory. It is calculated based on the annual demand, ordering cost, holding cost, and lead time.