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Applying the economic order quantity formula

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Apply the economic order quantity formula to the data in Example 2-2 and reproduce the answer of 2,828 units. Also, calculate the total annual cost incurred for the economic order quantity. Submit your solution.

EXAMPLE 2-2
Consider a hardware supply warehouse that is contractually obligated to deliver 1,000 units of a specialized fastener to a local manufacturing company each week. Each time the warehouse places an order for these items from its suppliers, an ordering and transportation fee of $20 is charged to the warehouse. The warehouse pays $1.00 for each fastener and charges the local firm $5.00 for each fastener. Annual holding cost is 25 percent of inventory value, or $0.25 per year. The warehouse manager would like to know how much to order when inventory gets to zero.

Annual demand (assuming the manufacturing plant operates for 50 weeks a year) is 50,000 units; annual holding cost is $0.25 per unit. And fixed setup cost per unit is $20.00. Each time the warehouse places an order, the optimal order quantity is thus 2,828.

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Applying the economic order quantity formula

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