How to Calculate Economic Order Quantity (EOQ) for Pen Set Inventory

What is the Economic Order Quantity (EOQ) for RBS Company's Pen Set inventory?

RBS Company’s top selling item is a Pen Set. RBS Company expects to sell 100 Pen Sets per month for the next 12 months. RBS Company purchases the Pen Sets from a supplier for $25 dollars each, and incurs a cost of $50 dollars for each order that they place. RBS Company estimates that their inventory carrying cost is 20% annually.

Answer:

EOQ = 155 units

Explanation:

Economic order quantity is the quantity at which a business incurs the minimum cost. It is the level of order where the holding cost equals the ordering cost of the business.

By using the given data:

Annual Demand = 100 per month x 12 months = 1,200 Pen Sets

Ordering cost = $50

Carrying cost = $25 x 20% = $5

EOQ = √[(2 x Ordering Costs x Demand) / Holding Costs]

EOQ = √[(2 x 50 x 1,200) / 5]

EOQ = 154.92 units = 155 units

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