You purchase lubricating oil in 55 gallon drums and consume and average of 484 drums per year. Preparing an order and receiving a shipment of lubricant costs $5.0 per order. Annual carrying costs are $76 per drum.

Determine the EOQ.

EOQ = 8 units.

Explanation:

Economic order quantity = sqrt{2DS}/h

where Q = EOQ units

D = demand in units

S = Order cost (per purchase order)

h = holding cost (per unit, per year)

h = Annual carrying cost: = 76 per drum

S=Ordering cost = $5 per order

D = Annual demand = 484 drums per year

Calculation: EOQ = sqrt{2 * 484 * 5} / 76

=sqrt (4840/76)

= 8 units

8 EOQ units where ordering cost and carrying are equal.

EOQ = ≅ 8

Explanation:

EOQ = √ (2SD) / H

S = ordering cost per order = $5.0

H = Holding cost = $76

D = Annual Demand = 484 drums

EOQ = √ (2 x 5 x 484) / 76

= √63.68

7.98

This implies that the optimal quantity that can be ordered for to minimize ordering and carrying cost is 8 drums per order.