Powell Electronics supplies chips to an electronics firm The

Powell Electronics supplies chips to an electronics firm. The chips have an annual demand of 250 units, and this is constant throughout the year. The carrying cost is estimated to be $1 per unit per year, and the ordering cost is $20 per year. To minimize cost, approximately how many units should be ordered each time an order is placed?

Solution

EOQ = SQRT((2*D*S)/H)

D = 250. S = $20. H= $1

EOQ = SQRT((2*250*20/1) = SQRT(10,000) = 100 units

Thus 100 units should be ordered each time in order to minimize the costs.