A Focal Firm has an annual requirement of 3,600 units of a component a year

Business Jan 28, 2021

A Focal Firm has an annual requirement of 3,600 units of a component a year. With Ordering costs of $15 per order, and carrying costs per unit are 40 percent of the purchase price when purchase price is of $1 each and lead time of 30 days. Determine the Economic order quantity of components to order.

Calculate

The EOQ in units.

Expert Solution

Computation of Economic Order Quantity (EOQ):

Economic Order Quantity (EOQ) = √ ((2 * S * D) / H)

Here,

Annual Demand (D) = 3600 units

Ordering cost (S) = $15 per order

Purchase price per unit = $1

Carrying cost per unit (H) = 40% of Purchase price = 0.40 * 1 = $0.40

Economic Order Quantity (EOQ) = √ ((2 * 15 * 3600) / 0.40)

= √ (108000 / 0.40)

= √ 270000

= 519.615

Economic Order Quantity (EOQ) = 520 units (Rounding off)

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