Suppose a company has 1,000 units of a raw material part on hand. If 750 of these

Question:

Suppose a company has 1,000 units of a raw material part on hand. If 750 of these units are routed into production, should the company place an order to stock up on more of these parts? In order to answer this question, determine the economic order quantity (EOQ) for this part, assuming that the following are true:

• The company plans to use 10,000 units during the coming year.

• The company orders this part in lots of 1,000 units, and each order placed carries a processing cost of $2.50.

• Each unit of inventory carries an annual holding cost of $6.40.

Economic Order Quantity
Economic order quantity (EOQ) is the ideal order quantity a company should purchase to minimize inventory costs such as holding costs, shortage costs, and order costs. This production-scheduling model was developed in 1913 by Ford W. Harris and has...