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A company is planning for its financing needs and uses the basic fixed-order-quantity inventory model. For an annual demand of 10,000, setup cost of $32, a holding cost per unit per year of $4, an a cost per unit of inventory of $150, calculate Economic Order Quantity (EOQ) andthe total cost (TC) of the inventory.

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Answer:

EOQ = 400 units

total cost of inventory = $1,501,600

Explanation:

the formula for calculating economic order quantity is:

EOQ = √(2DS / H)

  • D = annual demand in units
  • S = order cost per purchase order
  • H = holding cost per unit, per year

EOQ = √[2 x 10,000 x $32) / $4] = √($640,000 / $4) = √160,000 = 400 units

total cost of inventory = (total units x cost per unit) + (EOQ x holding cost per unit, per year) = (10,000 x $150) + (400 x $4) = $1,500,000 + $1,600 = $1,501,600