Demand for an item averages 1500 units per year It costs 100

Demand for an item averages 1500 units per year. It costs $100 to place an order for this item, and to hold one unit of this item in inventory for a year costs $10.02. If the Economic Order Quantity is used, what will total annual ordering and holding cost be?

Solution

Economic Order Quantity ( EOQ ) will be defined as :

EOQ = Square root ( 2 x Co x D / Ch)

Where,

D = Annual demand = 1500 units

Co = Ordering cost = $100

Ch = Annual unit inventory holding cost = $10.02

Therefore,

EOQ = Square root ( 2 x 100 x 1500 / 10.02) = 173.03 ( 173 rounded to nearest whole number)

Therefore, EOQ ( Economic Order Quantity ) = 173

Thus,

Annual ordering cost = Ordering cost x Number of orders = Co x Annual demand / EOQ = 100 x 1500/173 = $867.05

Annual inventory holding cost = Annual unit inventory holding cost x Average inventory = Ch x EOQ/2 = 10.02 X 173/2 = $866.73

Thus,

Total annual ordering and holding cost = $867.05 + $866.73 = $1733.78

TOTAL ANNUAL ORDERING AND HOLDING COST = $1733.78