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The monthly consumption of an item is 500 units. The price per unit is Rs. 25. The inventory carrying cost is 16% of item cost and ordering cost is Rs. 50 per order. For an economic order quantity model, determine the Re-order quantity
  • a)
    380 units
  • b)
    370 units
  • c)
    378 units
  • d)
    388 units
Correct answer is option 'D'. Can you explain this answer?
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Calculation of Re-order Quantity:
1. Calculate EOQ (Economic Order Quantity):
EOQ = sqrt((2 * D * S) / H)
Where,
D = Annual demand = 500 * 12 = 6000 units
S = Ordering cost = Rs. 50 per order
H = Inventory carrying cost = 16% of item cost = 0.16 * 25 = Rs. 4
EOQ = sqrt((2 * 6000 * 50) / 4) = 387.3 units
2. Round off EOQ to the nearest whole number:
Since we cannot order fractions of units, round off EOQ to the nearest whole number.
Re-order Quantity = 388 units
Therefore, the correct answer is option 'D' (388 units).
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