Annual Demand for a Product Is 40,000 Units

question 26

Multiple Choice

Annual demand for a product is 40,000 units.The product is used at a constant rate over the 365 days the company is open every year.The annual holding cost for the product is estimated to be $2.50 per unit and the cost of placing each order is $125.00.If the company orders according to the economic order quantity (EOQ) formula then its optimal order size for this product would be

• A)2,000 units.
• B)4,000 units.
• C)20,000 units.
• D)40,000 units.

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Definitions:

Setup Cost

Represents the expenses involved in preparing a machine, process, or system for a manufacturing run or production activity, which can include equipment adjustments and labor.

EOQ Model

Economic Order Quantity model is used in inventory management to determine the optimal order size that minimizes the total cost of inventory, including holding costs and ordering costs.

Total Annual Inventory Costs

The comprehensive sum of all expenses associated with holding and managing inventory over a year, including storage, insurance, and obsolescence costs.

Unit Price

The cost per unit of a product or service, which allows for the comparison of costs across different units and quantities.