EOQ standing for economic order quantity refer to the quantity of units that a company will add to its inventory each time it orders in order to minimize the total cost associated with inventory comprising of the holding cost,shortage costs, carrying cost, ordering cost among other costs.
EOQ is calculated as follows;
EOQ= v[(2DS)/H] where D= annual demand
S= Fixed ordering cost
H= variable holding cost
i) Determine the EOQ
EOQ= v[(2DS)/H]
D= 4000 units
S= 5000
H= 20% of sh 200
= v[(2*4000*5000)/(20%*200)]
= v[40,000,000/40]
= v1,000,000
EOQ= 1,000 units
ii) Frequency of ordering
Annual demand= 4000 units
EOQ= 1000
4000/1000= 4 orders annually
12/4= 3
Ordering frequency is once very 3 months
PrimeTutor answered the question on September 19, 2018 at 11:54
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