2) Annual demand for a make-to-stock product is 40,000 units. Each unit costs $12, and the annual holding cost rate is 15%. Setup time to change over equipment for this product is 2.0 hours and downtime cost of the equipment $180/hr. Determine (a) economic order quantity (b) total inventory costs.

a. Economic Order Quantity = 4,000 units

b. Total Inventory Cost = $7,200

Explanation:

Economic Order Quantity = √ (2*Annual Demand*Set-up Cost per Order) / Holding Cost per Unit

= √ (2*40,000*$180*2) / ($12*15%)

= √16,000,000

= 4,000

Total Inventory Cost = Set Up Cost + Holding Cost

= ((40,000/4,000) * ($180*2)) + ((4,000/2) * ($12*15%))

= $3,600 + $3,600

= $7,200