How to Calculate Economic Order Quantity (EOQ) for Pen Set Inventory
What is the Economic Order Quantity (EOQ) for RBS Company's Pen Set inventory?
RBS Company’s top selling item is a Pen Set. RBS Company expects to sell 100 Pen Sets per month for the next 12 months. RBS Company purchases the Pen Sets from a supplier for $25 dollars each, and incurs a cost of $50 dollars for each order that they place. RBS Company estimates that their inventory carrying cost is 20% annually.
Answer:
EOQ = 155 units
Explanation:
Economic order quantity is the quantity at which a business incurs the minimum cost. It is the level of order where the holding cost equals the ordering cost of the business.
By using the given data:
Annual Demand = 100 per month x 12 months = 1,200 Pen Sets
Ordering cost = $50
Carrying cost = $25 x 20% = $5
EOQ = √[(2 x Ordering Costs x Demand) / Holding Costs]
EOQ = √[(2 x 50 x 1,200) / 5]
EOQ = 154.92 units = 155 units