ABC Products company has hired your team to assist them in achieving their optim
ID: 2613356 • Letter: A
Question
ABC Products company has hired your team to assist them in achieving their optimal order size to enhance inventory management. As you know, there are two basic costs to inventory; handling and delivery as well as carrying costs (this includes storage and opportunity costs). For each order ABC Products Company makes, their fixed order cost is $375, while the annual carrying cost of their inventory is about $53 per ton. The company uses approximately 235,000 tons per year of wire rod.
Determine what the optimal economic order quantity (EOQ) is for ABC Products Cmpany and explain to their management how to use this tool.
Explanation / Answer
EOQ = square root of ( 2 * annual inventory * ordering cost)/ carrying cost
= square root of (2 *235,000 *375 )/53
=square root of (176,250,000)/53
=square root of (3325471.70)
= 1824 units approx
so management should order 1824 units each time so as to achieve economy in carrying and ordering cost.