Question

An ostomy clinic uses barrier rings on its patients to help prevent ostomy-related leaks. Last year, the clinic used 6,200 units of barrier rings. Each unit costs $50.94 and the annual holding cost per unit is $10. It costs $200 for each order placed and lead time for delivery is five days.

If the annual holding costs for rings was able to be decreased to $5.00 per unit, what would happen to the economic order quantity?

		It would stay the same.
		It would go higher.
		I don't have enough information to determine that.
		It would go lower.

Answer 1

Given -

Annual demand (D) = 6200.

Holding cost (C) = $10.

Ordering cost (O) = $50.94.

Now the formula to calculate EOQ is,

EOQ = √(2DO/C)

= √(2 × 6200 × 50. 94/10)

= √(631656/10)

= √(63165.6)

= 251.32 units.

Now, as is said that annual holding cost has decreased by $5 so, now the annual holding cost has become 10 - 5 = $5.

So, putting that formula,

EOQ = √(2DO/C).

= √( 2 × 6200 × 50.94/5)

= √(631656/5)

= √(126331.2)

= 355.43 units.

So, from the calculation it can be said that The EOQ has gone HIGHER. That means before the EOQ was 251.32 units and later after changing the holding cost it become 355.43 units, which is much higher than the previous value.

Hope this helps :)