Demand for an item is 1,000 units per year. Each order placed costs $10; the annual cost to carry items in inventory is $2 each.
a. In what quantities should the item be ordered?
b. Supposing a $100 discount on each order is given if orders are placed in quantities of 500 or more. Should orders be placed in quantities of 500, or should you stick to the decision you made in a?
a. We calculate the economic order quantity (EOQ) so as to minimize the total inventory carrying costs
EOQ = Square root ((2Xannual requirementXorder cost)/carrying cost)
annual requirement is 1,000
order cost is 10
carrying cost ...
The solution explains how to calculate the economic order quantity.