A firm that makes electronic circuits has been optimally ordering a certain raw material 250 ounces at a time. The firm estimates that carrying cost is I = 30% per year, and that ordering cost is about $20 per order. The current price of the ingredient is $200 per ounce. The assumptions of the basic EOQ model are thought to apply. For what value of annual demand is their action optimal?

In the following situation:

A firm that makes electronic circuits has been optimally ordering a certain raw material 250 ounces at a time. The firm estimates that the carrying cost is I = 30% per year and that ordering cost is about $20 per order. The current price of the ingredient is $200 per ounce.

The value of annual demand for the action optimal is:

93,750.

Explanation:

To understand this answer we need to understand first a few things. First, an Economic Order Quantity is a concept in inventory management that represents the order quantity that reduces at is last point the holding and ordering costs. The formula to calculate it is:

The square root of [( two times the annual demand in units times the incremental cost to process an order) Divided by (the incremental annual cost to carry one unit in inventory)]

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