Economic Order Quantity Model

Here is the problem:

In this task, apply the economic order quantity model and economic production lot model.

Company B's demand is uniform thoroughout the year and totals 15,000 units per year. The production setup costs total $84 per setup. The annual holding cost rate is 28% of the value of the inventory. The per-unit cost of finished product is $19. The production rate is constant and equivalent to 60,000 units per year.

The formula is Q=square root of 2CD over H
Q=optimal order qty
C=fix cost per order
D=annual demand
H=annual holding cost per unit

So my formula for the above situation was:

Q= square root of 2(84)(15000) over 19(.28)
Q=688.25

My assignment was given back for revision saying that the value given is too low and that the denominator is not correct.

Help!

SWood said:

My assignment was given back for revision saying that the value given is too low and that the [radicand's] denominator is not correct.

Click to expand...

By commenting on the incorrectness of the denominator only, I assume that the grader implies that the numerator is correct.

Therefore, if we want to increase the EOQ, then we need to decrease the annual holding cost per unit. That is, H needs to be smaller, to make the value of the radicand bigger.

You calculated H as 28% of $19. (That's a cost of $5.32 to hold one unit in stock for a year, yes?)

Warning: The only business course that I ever took was something like Chinese Economic Geography. (I wasn't there to learn about economies.)

Using Google, I tried to find a clear definition of how to calculate H. My conclusion is that the world still has too many economists.

One model divides by 2.

One model divides by 2 and multiplies by a factor of (1 - D/P), where P is annual production.

I suggest that you go back to your materials, and focus on their definition of H and how to calculate it. I'm thinking that the production rate (i.e., the 60000 value) might come into play, somewhere.

What do you think?