Calculating Annual Demand

To calculate the annual demand, we need to use the EOQ formula, which is given as:

EOQ = √((2DS)/H)

Where,
D = Annual demand
S = Ordering cost per order
H = Carrying cost per unit

Given:
EOQ = 2500 units
Ordering cost (S) = 120
Carrying cost (H) = 10% of purchase price

Purchase price = $24 per unit

Calculating Carrying Cost
Carrying cost = 10% of purchase price = 10/100 * 24 = $2.4 per unit

Calculating Annual Demand
EOQ = √((2DS)/H)
2500 = √((2 * D * 120)/2.4)
2500 = √(50D)
D = (2500^2)/50
D = 125000/50
D = 2500 units

Therefore, the annual demand is 2500 units.

Explanation

The EOQ formula is used to calculate the optimal order quantity that minimizes the total cost of ordering and carrying inventory. The formula takes into account the annual demand, ordering cost per order, and carrying cost per unit. By solving the formula for annual demand, we can determine the quantity of goods that will be ordered in a year.

In this case, the EOQ is given as 2500 units, and the ordering cost is $120 per order. The carrying cost is calculated as 10% of the purchase price, which is $2.4 per unit. Using the EOQ formula, we can solve for annual demand, which turns out to be 2500 units.

By knowing the annual demand, a business can better plan its inventory management and make informed decisions about when to order goods to avoid stock-outs or overstocking. Additionally, the calculation of annual demand can help a business to determine the most cost-effective ordering and inventory management strategies.