Answer to Question #274153 in Management for Bolodeoku Daniel

Question

Ababio and Sons Company ltd purchases raw material from Nananom Ltd. The total

annual demand for this product is 150,000 units. If the holding cost per unit is ₵5,000

and the ordering cost per unit is ₵600 per order.

i. Explain what is Economic Order Quantity (5 marks)

ii. What will be the economic order quantity for the Ababio & Sons? (6marks)

and

iii. Calculate the Total Cost for Ababio and sons at the economic order and

comment/advise appropriately (6marks)

Answer 1

I) Economic Order Quantity, also known as Economic Purchase Quantity, is the order quantity that minimizes the total holding costs and ordering costs in inventory management. It is one of the oldest classical production scheduling models.

ii) EOQ = square root of: [2(setup costs)(demand rate)] / holding costs.

=square root os:(2(150,000)(600).)/5000

EOQ=189.74

iii) 189.74