Engineering Board Exam Reviewer · Cost Concepts and Economic Quantities · hard

A firm uses 12,000 units of an item per year. Each order costs P500 to place and holding costs P12 per unit per year. Using the economic order quantity, find the minimum total annual ordering and holding cost.

1. P6,000
2. P24,000
3. P18,000
4. P12,000

Answer

D. P12,000

Solution

EOQ=sqrt(2DS/H)= 2(12,000)(500)12=1,000 units. Orders per year =12, so ordering cost =12(500)=6,000; average inventory =500 units, so holding cost =500(12)=6,000. Total =P12,000.

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