Question

The following basic information is provided and applies to all questions below. Currently, the annual demand for a product is 1000 units, the setup (i.e., ordering cost) per order is $45, and the holding cost is 80 cents per item per year.

Q1. Calculate the EOQ for the current year using the basic information provided. With other things constant, demand is expected to grow by 15% for each of the next five years. For next year, this means that demand is assumed to be 1000 * 1.15.

Use the SHORTCUT method discussed in class to provide the EOQ for each of the next five years. Label these EOQ(1), EOQ(2),….EOQ(5). For the final year, compute EOQ(5) using the LONG method (by computing the expected demand and substituting in the EOQ formula) and compare to your answer obtained by the SHORTCUT method. Keep at least four places of decimal in your calculations (you can keep 2 places for the calculated EOQ)

Answer 1

Economic Order Quantity (EOQ)

It is the ideal order quantity a company should purchases to minimize inventory costs such as holding cost, storage costs, and other costs. This EOQ Model developed by Ford W. Harrris in the year 1913 and has been redifined over the years.

EOQ help to minimize the total cost relates to ordering cost, receiving and the holding cost.

From the EOQ firm must reduce the cost by ordering the product at once and utilize the cost reduction.

EOQ is determined by multiply the demand of the product per year to th eordering cost and divide to the holding cost and taking square of all, we get EOQ.

Below requirement attached for the working of EOQ FOR THE NEXT FIVE year with every time demand changes by 15%.

Ordering cost is $45 and the holding cost is 80%.

A s the demand increases EOQ ALSO INCREASES.

Solution Attached: