Abey Kuruvilla, of Parkside Plumbing, uses 1,220 of a certain spare part that costs $26 for each order, with an annual holding cost of $25.

a) Calculate the total cost for order sizes of 25, 40, 50, 60, and 100 (round your responses to two decimal places).

b) What is the economic order quantity?

Total cost = Total ordering cost + Total holding cost

Total cost = DCo/Q + QH/2

Where D = Annual demand, Co = Ordering cost per order and H = holding cost per item per annum.

For 25 Order Size

Total cost = 1,220 x $26/25 + 25 x $25/2

Total cost = $1,268.80 + $312.50 = $1,581.30

For 40 Order Size

Total cost = 1,220 x $26/40 + 40 x $25/2

Total cost = $793 + $500 = $1,293.00

For 50 Order Size

Total cost = 1,220 x $26/50 + 50 x $25/2

Total cost = $634.40 + $625 = $1,259.40

For 60 Order Size

Total cost = 1,220 x $26/60 + 60 x $25/2

Total cost = $528.67 + $750 = $1,278.67

For 100 Order Size

Total cost = 1,220 x $26/100 + 100 x $25/2

Total cost = $317.20 + $1,250 = $1,567.20

b. The economic order quantity is 50 units because it reduces the total cost to $1,259.40

Explanation:

In this case, we need to determine the total costs based on different order sizes. Thus, economic order quantity is the order size that minimises the total cost.