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Homework answers / question archive / Cress Electronic Products manufactures components used in the automotive industry
Cress Electronic Products manufactures components used in the automotive industry. Cress purchases parts for use in its manufacturing operation from a variety of different suppliers. One particular supplier provides a part where the assumptions of the EOQ model are realistic. The annual demand is 5000 units, the ordering cost is $80 per order, and the annual holding cost rate is 25%.
a. If the cost of the part is $20 per unit, what is the economic order quantity?
Computation of the economic order quantity (EOQ):-
EOQ = (2 * Annual demand * Order cost / Holding cost) ^ (1/2)
= (2 * 5,000 * 80 / ($20 * 25%)) ^ (1/2)
= ($800,000 / $5) ^ (1/2)
= 160,000 ^ (1/2)
= 400 units
