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Hi Sir,
Hope you are well. Thank you for the great lectures. I am struggling with the below question, I hope you can help please;demand for Product Pis 300,000 units and an order for new inventory is placed each month. Each order costs $267 to place. The cost of holding Product P in inventory is 10 cents per unit per year. Buffer inventory equal to 40% of one month’s sales is maintained.
The EOQ was 40,025, which means there are 7.5 orders.
The question asks: what is the total annual cost of the policy based on using the EOQ.
For the order costs I put 8, as it states each order costs £267. A 0.5 order is still 1 order but the answer was 7.5 (£2002) :(. Can you please advise.
Thank you in advance
With regard to the number of orders – this you do not round.
In your example you would leave it at 7.5This may seem strange – obviously they can’t place7.5 orders a year. However we always assume that it is a long-term decision and so some years they will place 7 orders and other years 8 orders – on average it will be 7.5 orders a year.
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