What is the Economic Order Quantity (EOQ) for concrete blocks if annual demand is 10,000 blocks, ordering cost is $200 per order, and carrying cost is $2 per block per year?
Correct Answer
A) 1,414 blocks
EOQ = √(2 × Annual Demand × Ordering Cost / Carrying Cost) = √(2 × 10,000 × 200 / 2) = √2,000,000 = 1,414 blocks. This minimizes total inventory costs.
Why This Is the Correct Answer
Option A (1,414 blocks) is correct because it uses the proper EOQ formula: √(2 × Annual Demand × Ordering Cost / Carrying Cost). Substituting the values: √(2 × 10,000 × 200 / 2) = √(4,000,000 / 2) = √2,000,000 = 1,414.21, which rounds to 1,414 blocks. This quantity minimizes the total combined costs of ordering and carrying inventory.
Why the Other Options Are Wrong
Option B: 2,000 blocks
Option B (2,000 blocks) is incorrect because it appears to be calculated by simply dividing annual demand by ordering cost (10,000 ÷ 200 = 50, then multiplied by 40), which is not the EOQ formula. This would result in higher total inventory costs than the optimal EOQ.
Option C: 1,000 blocks
Option C (1,000 blocks) is incorrect because it's likely calculated by taking the square root of annual demand (√10,000 = 100, then multiplied by 10), which ignores the ordering and carrying costs entirely. This oversimplified approach doesn't optimize inventory costs.
Option D: 2,236 blocks
Option D (2,236 blocks) is incorrect because it appears to use an incorrect formula or calculation error. This might result from incorrectly applying the EOQ formula or using wrong values in the calculation, leading to a suboptimal order quantity.
Memory Technique
Remember EOQ with 'Every Order Quantity': E=√, O=2×Ordering cost×quantity, Q=divided by carrying cost. Think '2 times the top, square root the lot!'
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