Question

In: Operations Management

A product whose EOQ is 40 units experiences a decrease in ordering cost from $90 per...

A product whose EOQ is 40 units experiences a decrease in ordering cost from $90 per order to $22.5 per order. The revised EOQ is:

a) three times as large.

b) one-third as large.

c) nine times as large.

d) one-ninth as large.

e) half as large.

f) cannot be determined.

Expert Solution

Ans) e ) Half as large

Working

We know EOQ = 2DK / h

D = Annual Demand

K = Ordering cost

h = holding cost per unit per unit of time

From question --

When K1 = $90

EOQ1 = 40 = 2DK1 / h

EOQ1 = 40 = (2D *90) / h

When K2 = $22.5

EOQ2 = 2DK2 / h

EOQ2= 2D * 22.5 / h

Now we need to find

(EOQ1 / EOQ2)

So that we will calculate EOQ2

(40 / EOQ2) =( (2D *90) / h ) / ( 2D * 22.5 / h )

Now D & h will reamin same and hence cancel out

So we have

(40 / EOQ2) = 90 / 22.5

(40 / EOQ2) =4

(40 / EOQ2) = 2

EOQ2 = 20

Now

(EOQ1 / EOQ2) = 40 / 20

EOQ2= 0.5 EOQ1

The revised EOQ is half of previous EOQ

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keosha answered 3 months ago

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