Ira Grace B. De Castro.

ACN1 | CAED101

ECONOMIC ORDER QUANTITY

Westside Auto purchases a component used in the manufacture of automobile generators directly from the
supplier. Westside’s generator production operation, which is operated at a constant rate, will require 1000
components per month throughout the year (12,000 units annually). Assume that the ordering costs are $25
per order, the unit cost is $2.50 per component, and annual holding costs are 20% of the value of the
inventory. Westside has 250 working days per year and a lead time of 5 days. Answer the following
inventory policy:
a. What is the EOQ for this component?
b. What is the reorder point?
c. What is the cycle time?
d. What are the total annual holding and ordering costs associated with your recommended EOQ?

a. Economic order quantity

2𝐷𝐶𝑜
EOQ =√
𝐶ℎ

2(12,000)($25)
=√
(0.20)($2.50)

600,000
=√
$0.50
= √1,200,000
= 1,095.4451 ∿ 1,095.45

b. Reorder point
r = dm
12,000
= (5)
250
= 240

c. Cycle time
250Q∗
T=
𝐷
250(1,095.45)
=
12,000
273,862.50
=
12,000
= 22.821875 ∿ 22.82 days

d. Total annual cost

1 𝐷
TC = 𝑄𝐶ℎ + 𝐶
2 𝑄 𝑜
1 12,000
= (1,095.45)(0.50) + (25)
2 1,095.45
= 273.8625 + 273.8600575
= 547.7225575 ∿ $547.72