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Economic Order Quantity (EOQ): An Example

A large bakery buys flour in 25-pound bags. The bakery uses an average of 4,860 bags a year. Preparing an order and receiving a shipment of flour involves a cost of $10 per order. Annual carrying costs are $75 per bag.

a) Determine the economic order quantity.
b) What is the average number of bags on hand?
c) How many orders per year will there be?
d) Compute the total cost of ordering and carrying flour.

e) If ordering costs were to increase by $1 per order, how much would that affect the minimum total annual cost?

Solution Summary

An inventory model example problem for finding economic order quantity or economic lot size with uniform rate of demand is done. Formulae for EOQ and Minimum average cost are given.