Question

Teta Traders purchases 500 pen sets during the year at R100 per set. The pen sets are sold at R400 each at a steady rate during the year. The cost of placing a single order amounts to R40. Inventory holding cost is R10 per set. Calculate the economic order quantity.

Answer 1

Solution :

Economic order quantity is calculated using the following formula:

= ( 2AO / C ) ^{( ½ )}

Where A = Annual usage units

O = Ordering cost per unit

C = Annual carrying cost of one unit i.e.,

As per the information given in the question :

Purchase price per unit = R 100

A = Annual usage units = 500 Pen sets

O = Ordering cost per unit = R 40

C = Annual Inventory carrying cost of one unit = R 10

Thus Economic order quantity = ( ( 2* 500 * 40 ) / 10 ) ^{( ½ )}  

= ( 40,000 / 10 ) ^{( ½ )}

= ( 4,000 ) ^{( ½ )}

= 63.2456 ( when rounded off to four decimal places )

= 63.25 ( when rounded off to two decimal places )

= 63 orders ( when rounded off to the nearest integer )

Thus the Economic Order Quantity = 63.25 Orders

= 63 orders ( when rounded off to the nearest integer )

Note : The square root of 4,000 is calculated using the following formula in excel

=SQRT(Number) = SQRT(4,000) = 63.2456