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# Economic Order Quantity (EOQ), Ordering Costs, and Average Cycle Stock

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Monthly demand for an inventory item currently averages 160 units. The annual carrying cost is \$10 per unit. Ordering cost is \$60 per order. This information applies to all of the questions on this page.

Find the EOQ. Please show the formula (with values) you used.

2.Suppose instead of using the EOQ, we decide to use Q = 200 for the item in the question above.
What is the average cycle stock inventory under this policy? Show your work and clearly label your answer.

3.
Suppose instead of using the EOQ, we decide to use Q = 200 for the item in the question above.
What is the average number of orders per year under this policy? Show your work and clearly label your answer.

4.
Suppose instead of using the EOQ, we decide to use Q = 200 for the item in the question above.
What is the average annual ordering cost under this policy? Show your work and clearly label your answer.

5.
Suppose instead of using the EOQ, we decide to use Q = 200 for the item in the question above.
What is the average annual carrying cost under this policy? Show your work and clearly label your answer.

#### Solution Preview

EOQ is the result of minimizing a total cost function that is comprised (in this case) of two parts:
Total Cost = Ordering cost + Holding cost
• In this case, ordering cost is \$60
o I will denote this variable with "S"
• Holding cost is also known as carrying cost, which is \$10/unit
o This will be denoted ...

#### Solution Summary

Economic order quantity, order costs and the average cycle stocks are examined.

\$2.19