A department store sells 10,000 units of handbags per year. The store orders handbags from a...

A department store sells 10,000 units of handbags per year. The store orders handbags from a manufacturer. Each time an order is placed, an ordering cost of $40 is incurred. The store pays $30 for each hand bag. The holding cost of $1 of inventory is 25 cents per year. (i.e. inventory holding rate is 25%). What is the economic order quantity?

Expert Solution

Annual demand (D) = 10000 units

Ordering cost (S )= $40

Holding cost (H) = 25% of cost = 25% of $30 = $7.5

Economic order quantity = sqrt of (2DS / H)

= sqrt of [(2 x 10000 x 40)/7.5]

= 326.60 or rounded to 327 units

keosha answered 2 years ago

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