Economic Order Quantity (EOQ)
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Suppose that you are the manager of a production department that uses 400 boxes of rivets per year. The supplier quotes you a price of $8.50 per box for an order size of 199 boxes or less, a price of $8.00 per box for orders of 200 to 999 boxes, and a price of $7.50 per box for an order of 1,000 or more boxes. You assign a holding cost of 20 percent of the price to this inventory. What order quantity would you use if the objective is to minimize total annual costs of holding, purchasing, and ordering? (Assume ordering cost is $80/order.)
D= 400 boxes per year
S= $80
H=.20P
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Solution Summary
The solution computes Economic Order Quantity (EOQ), annual cost.
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Economic Order Quantity (EOQ) = squareroot(2*d*2/h)
Because the demand is only 400, we shall look for 2 price quotes only (8.50 per box or 8.00per box)
If price is ...
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