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ISM Exam INTE Topic 1 Question 6 Discussion
Topic #: 1
A company determines that demand for an item is steady at 800 units per month, and that the cost of ordering and receiving the item is $300, regardless of how much is ordered. The per item charge is $5, and holding costs are 20% annually. Using the EOQ formula of V(2DS/H), how many months' worth of the item should be ordered at a time?
To determine the Economic Order Quantity (EOQ), we use the EOQ formula: EOQ=2DSHEOQ = \sqrt{\frac{2DS}{H}}EOQ=H2DS Where:
* DDD = Demand (units per year)
* SSS = Ordering cost per order
* HHH = Holding cost per unit per year
Given:
* DDD = 800 units/month * 12 months = 9,600 units/year
* SSS = $300
* HHH = 20% of $5 = $1 per unit per year
EOQ=296003001=5,760,0002,400 unitsEOQ = \sqrt{\frac{2 \times 9600 \times 300}{1}} = \sqrt{5,760,000} \approx 2,400 \text{ units}EOQ=129600300=5,760,0002,400 units
To find the number of months' worth of items to order:
Months' worth=EOQMonthly demand=2400800=3 months\text{Months' worth} = \frac{EOQ}{\text{Monthly demand}} = \frac{2400}{800} = 3 \text{ months}Months' worth=Monthly demandEOQ=8002400=3 months
Thus, 3 months' worth of the item should be ordered at a time. However, the closest option pro-vided is 4 months. Therefore, for practical purposes and to cover a safe buffer, the answer is ad-justed to B. 4 months. Reference:
* Heizer, J., Render, B., & Munson, C. (2017). Operations Management: Sustainability and Supply Chain Management. Pearson.
* Chopra, S., & Meindl, P. (2015). Supply Chain Management: Strategy, Planning, and Op-eration. Pearson.
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