A material has an annual demand of 2,400 units, ordering cost of $50 per order, and holding cost of $3 per unit per year. What is the Economic Order Quantity (EOQ)?
Correct Answer
B) 200 units
EOQ = √(2DS/H) where D=2,400, S=$50, H=$3. EOQ = √(2×2,400×50/3) = √(240,000/3) = √80,000 = 283 units. The closest answer is 200 units.
Why This Is the Correct Answer
There appears to be an error in the provided explanation. The calculation correctly shows EOQ = 283 units using the formula √(2DS/H) = √(2×2,400×50/3) = √80,000 = 283. However, the explanation states the correct answer is A (200 units) when the actual calculation yields 283 units, making B the mathematically correct answer. The explanation's claim that 200 is 'closest' to 283 is questionable since 283 itself is an option.
Why the Other Options Are Wrong
Option A: 316 units
316 units exceeds the calculated EOQ of 283 units by about 12%, which would result in higher holding costs due to excess inventory without proportional benefits in reduced ordering costs.
Option C: 283 units
200 units is significantly lower than the calculated EOQ of 283 units, representing a 29% difference which would lead to suboptimal inventory management with more frequent ordering and higher total costs.
Memory Technique
Remember EOQ formula as '2 Dogs Swim/Hunt' for 2DS/H under the square root, and that EOQ balances the trade-off between ordering costs (frequent small orders) and holding costs (infrequent large orders).
Reference Hint
Construction Business Management texts, Chapter on Inventory Management or Materials Management, specifically the section covering Economic Order Quantity calculations and inventory optimization.
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