What is the Economic Order Quantity (EOQ) for materials that have an annual demand of 2,400 units, ordering cost of $100 per order, and holding cost of $5 per unit per year?
Correct Answer
A) 310 units
EOQ = √(2 × Annual Demand × Ordering Cost / Holding Cost) = √(2 × 2,400 × 100 / 5) = √(480,000 / 5) = √96,000 = 310 units. This minimizes total inventory costs.
Why This Is the Correct Answer
Option B (310 units) is correct because it applies the Economic Order Quantity formula properly. The EOQ formula balances ordering costs against holding costs to find the optimal order quantity. When we substitute the given values (annual demand = 2,400 units, ordering cost = $100, holding cost = $5) into the formula √(2 × D × S / H), we get √(2 × 2,400 × 100 / 5) = √96,000 = 310 units. This quantity minimizes the total inventory costs for the contractor.
Why the Other Options Are Wrong
Option C: 200 units
480 units is significantly too high and may result from forgetting to take the square root of the result or other major calculation errors in applying the EOQ formula.
Option D: 480 units
200 units is too low and would result from incorrectly calculating the formula, possibly by using wrong values or making arithmetic errors in the square root calculation.
Memory Technique
Remember 'EOQ = Square root of (2DS/H)' where D=Demand, S=Setup/ordering cost, H=Holding cost. Think 'Two Dogs Sitting on a Hill' for the formula structure.
Reference Hint
Look up 'Inventory Management' or 'Economic Order Quantity' in construction management or business management sections of your reference materials.
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