Problem 6-18

Lila battle has determined that the annual demand for number 6 screws is 100,000 screws. Lila,
who works in her brother’s hardware store, is in charge of purchasing. She estimates that it costs
$10 every time an order is placed. This cost includes her wages, the cost of forms used in the
placing order, and so on. Furthermore, she estimates that the cost of carrying one screw in the
inventory for an year is one-half of one cent. Assume that the demand is constant throughout the
year.

(a) How many number 6 screws should Lila order at a time if she wishes to minimize total
inventory cost?
(b) How many orders per year would be placed? What would the annual ordering cost be?
(c) What would the average inventory be? What would the average holding cost be?

D = Demand = 100,000

C = Order cost = $10

h = holding cost = $0.005

2 CD 2 ×10 ×100,000
Economic Order Quantity = EOQ = Q =
√ h
=
√ 0.005
=20,000

Lila should order 20,000 number 6 screws at a time to minimize total inventory cost.

D 100,000
Number of orders placed in an year = = =5
Q 20,000

5 orders would be placed per year.

CD $ 10× 100,000
Annual ordering cost = = =$ 50
Q 20,000

Q 20,000
Average inventory = = =10,000
2 2

Qh 20,000 × $ 0.005
Average inventory cost = = =$ 50
2 2