Your company maintains an inventory of electrical supplies. Annual demand is 2,400 units, ordering cost is $50 per order, and holding cost is $2 per unit per year. What is the Economic Order Quantity (EOQ)?
Correct Answer
B) 346 units
EOQ = √(2 × Annual Demand × Ordering Cost ÷ Holding Cost) = √(2 × 2,400 × $50 ÷ $2) = √(240,000 ÷ 2) = √120,000 = 346 units.
Why This Is the Correct Answer
Option D (346 units) is correct because it properly applies the Economic Order Quantity formula. 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 = $50, Holding Cost = $2) into the formula EOQ = √(2 × D × S ÷ H), we get √(2 × 2,400 × 50 ÷ 2) = √120,000 = 346 units.
Why the Other Options Are Wrong
Option C: 200 units
200 units is too low and would result from an incorrect calculation, possibly from forgetting to multiply by 2 in the numerator or making an arithmetic error in the square root calculation.
Option D: 300 units
300 units is close but incorrect, possibly resulting from rounding errors during intermediate calculations or miscalculating the square root of 120,000.
Memory Technique
Remember EOQ as 'Every Order Quantity' needs the formula: Square root of '2DS over H' where D=Demand, S=Setup/ordering cost, H=Holding cost.
Reference Hint
Look up 'Inventory Management' or 'Economic Order Quantity' in construction business management or project management reference materials, typically found in chapters covering cost control and materials management.
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