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EOQ analysis Tiger Corporation purchases 1,400,000 units per year of one compo-nent
EOQ analysis Tiger Corporation purchases 1,400,000 units per year of one compo-nent. The fixed cost per order is $55. The annual carrying cost of the item is 27% of its $10 cost.
a. Determine the EOQ if (1) the conditions stated above hold, (2) the order cost is $1 rather than $55, and (3) the order cost is $55 but the carrying cost is $0.01.
b. What do your answers illustrate about the EOQ model? Explain.
Expert Solution
Answer:
1: EOQ= SQRT(2*D*S/H)
= SQRT(2*1400000*55/(27%*10))
=7552.29
2: EOQ= SQRT(2*D*S/H)
= SQRT(2*1400000*1/(27%*10))
= 1018.35
3: EOQ= SQRT(2*D*S/H)
= SQRT(2*1400000*55/0.01)
= 124096.74
Higher the ordering cost, higher the EOQ since the firm wants to reduce the number of orders. Also lower the carrying cost, higher the EOQ since there are lesser costs of holding the extra inventory
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