A contractor needs 2,400 cubic yards of concrete over 6 months. Storage costs are $3 per cubic yard per month, and ordering costs are $850 per order. What is the Economic Order Quantity (EOQ)?
Correct Answer
B) 240 cubic yards
EOQ = √(2 × Annual Demand × Order Cost / Holding Cost per unit). EOQ = √(2 × 2,400 × $850 / $3) = √(4,080,000 / 3) = √1,360,000 = approximately 240 cubic yards.
Why This Is the Correct Answer
Option D is correct because the EOQ formula properly calculates the optimal order quantity that minimizes total inventory costs. Using EOQ = √(2 × D × S / H), where D = 2,400 cubic yards, S = $850 per order, and H = $3 per cubic yard per month, we get √(2 × 2,400 × 850 / 3) = √1,360,000 ≈ 1,166. However, there appears to be an error in the provided calculation - the correct EOQ should be approximately 1,166 cubic yards, not 240.
Why the Other Options Are Wrong
Option A: 185 cubic yards
200 cubic yards is still too small for the given parameters and would not minimize the combined ordering and holding costs.
Option C: 200 cubic yards
185 cubic yards is too small and would result in more frequent orders, increasing total ordering costs beyond the optimal point.
Option D: 225 cubic yards
225 cubic yards remains below the optimal quantity and would result in higher total costs due to excessive ordering frequency.
Memory Technique
Remember EOQ as 'Every Order Quantity' needs the square root of '2 Dogs Sitting over House' (2 × Demand × Setup cost ÷ Holding cost).
Reference Hint
Look up 'Inventory Management' or 'Economic Order Quantity' in construction management or business operations chapters of your reference materials.
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