For a given product, the order placement cost is $5, the holding cost per unit per year is $10, and annual demand is 1,600 units.

If the EOQ is used, total annual logistics costs will amount to which of the following?

a. $100
b. $200
c. $400
d. $800
e. None of the above

c) Total annual logistics cost = $400

Explanation:

The Economic Order Quantity (EOQ) is the order quantity that minimizes the balance of holding cost and ordering cost. At the EOQ, the holding cost is exactly the same as the ordering cost.

It is calculated as follows:

EOQ = (2× Co  D)/Ch)^(1/2)

Co- ordering cost Ch - holding cost, D- annual demand

So we apply the formula:

EOQ = (2× 5 × 1600/10)^(1/2

      = 40 units

Holding cost

Holding cost = EOQ/2 × Ch

= 40/2 × $10 =$200

Ordering cost

Ordering cost = (Annual demand/EOQ) × Ordering cost per order

= (1600/40)× $5 = $200

Total logistics costs

Total annual logistics cost = Holding cost + Ordering cost

= $200+$200

=$400

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