A manufacturer uses Rs 40000 worth of an item during the year He has estimated the ordering cost as Rs 100 per order and carrying costs as 25 percent of average inventory value Find the optional order?

Answer 1

To find the optimal order quantity (EOQ), we can use the Economic Order Quantity formula:

[ EOQ = \sqrt{\frac{2DS}{H}} ]

where (D) is the annual demand (Rs 40,000), (S) is the ordering cost (Rs 100), and (H) is the carrying cost per unit (25% of the average inventory value). The average inventory value is half of the order value, which is (Rs 40,000 / 2 = Rs 20,000). Thus, (H = 0.25 \times 20,000 = Rs 5,000).

Substituting the values into the EOQ formula:

[ EOQ = \sqrt{\frac{2 \times 40000 \times 100}{5000}} = \sqrt{1600} = 40 ]

Therefore, the optimal order quantity is 40 units.