You project to order 100,000 widgets to sell this year. You do an EOQ analysis t

Question

You project to order 100,000 widgets to sell this year. You do an EOQ analysis to confirm the optimum order amount. It shows that figure to be 2,000 per order. You then use this information to show that the total inventory cost at this level of ordering will be $6,000 per year. The purchasing person has been in the job for 30 years and has their own method of ordering, and prefer to order only 1,000 widgets at a time, which you then calculate would yield an inventory cost of $7,500. Explain to this person in your own words why the orders should be for 2,000 widgets.

Explanation / Answer

So the basic fundamental of EOQ it minimises the overall inventory cost which includes both the holding as well as the inventory carrying cost. So if we order at EOQ the number of orders that needs to be placed in the entire year would be half if we order 1000 at a time. This would reduce the ordering cost and hence overall inventory cost.

So we need to order at EOQ level only.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.