Question

Annual demand of a product is 50000 units and the ordering cost is Rs. 7000 per order. Considering the basic economic order quantity model, the economic order quantity is 10000 units. When the annual inventory cost is minimized, the annual inventory holding cost (in Rs.) is

• A. 35000

Answer 1

The correct option is A 35000
Method I:

For minimum annual inventory cost,

Ordering cost = Holding cost

7000 × number of order = holding cost or Holding cost

$7000\times \frac{50000}{10000}=Rs.35000$

Method II:

$\text{Given: EOQ, Q* = 10000 units, D = 50000 units}$

$c_o=Rs.7000/order$

As we know,

$Q^{\ast }=\sqrt{\frac{2D{C}_o}{C_h}}$

$10000=\sqrt{\frac{2\times 50000\times 7000}{C_h}}$

$C_h=Rs.7/\text{unit/year}$

$\text{Annual carrying cost}=\frac{Q^{\ast }}{2}\times C_h$

$=\frac{10000}{2}\times 7=Rs.35000$