Henry Crouch's law office has traditionally ordered ink refills 65 units at a time. The firm estimates that carrying cost is 40 % of the $11 unit cost and that annual demand is about 245 units per year. The assumptions of the basic EOQ model are thought to apply. For what value of ordering cost would its action be optimal?

The answer is: the ordering cost will be $38

Explanation:

We have the formula for economic order quantity is:

EOQ = Square root of (2 x S x D / H)

in which: S ordering cost;

D: Quantity demand

H: carrying cost

For the law office to act at optimal level by ordering EOQ at 65 units a time, The ordering cost will be found be the equation:

65 = square root of (2 x S x 245 / 4.4) 4,225 = (2 x S x 245) / 4.4 4,225 = 1225S / 11 S = $38

Thus, the ordering cost will be $38.