Question

A California distributor of sporting equipment expects to sell 10,000 cases of tennis balls during the coming year at a steady rate. Yearly carrying costs (to be computed on the average number of cases in stock during the year) are $10 per case, and the cost of placing an order with the manufacturer is $45. Determine the economic order quantity, that is, the order quantity that minimizes the inventory cost.

Answer 1

Economic Order Quantity

The economic order quantity, that is, the order quantity that minimizes the inventory cost is:

300 cases of tennis balls

Data and Calculations:

Sales of tennis balls for the coming year = 10,000 units

Carrying (holding) costs per case = $10

Cost of placing orders with the manufacturer = $45 per order

Economic Order Quantity (EOQ) = square root of (2 * Annual Demand/Sales * Ordering cost)/Carrying cost per case

= square root of (2 * 10,000 * $45)/$10

= square root of 90,000

= 300 tennis balls

This implies that the distributor will place about 33 orders in the coming year.  With each order, the quantity placed is 300 units.  This is the economic order quantity that will minimize its inventory cost for the year.