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Question: A company wishes to minimise its inventory costs. Order costs r $10 per order and holding costs r $0.10 per unit per month. Fall Co estimates annual demand to be 5,400 units.
What is the EOQ?
A. 949 units
B. 90, 000 units
C. 1,039 units
D. 300 unitsThe answer they got was D. 300 units because they divided the demand by 12, not sure why…your help is appreciated.
My answer was C.1,039 units
The answer D is right and the reason isnt what you gave that they divided the demand by 12. The fact is as you can see that in the question it says the holding cost is for per month. So to be consistent with other EOQ values we should change that to year as well by multiplying 0.10 per month to 12 to get the holding costs for a year. (0.10*12= 1.2). Hope that clears it.
So if they didn’t specify then we automatically calculate for the year??
Think I understand. Thanks! ^^
Yeah Economic order quantity values used in the formula are for the year. So if they are given for the year then fine and if not then make sure you first convert them into year. Also the demand value should be for year as well to be used in formula. Sometimes its given monthly, quaterly etc. So just convert them all for year and then plug into the formula to get the answer
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