A bookstore expects to sell 400 calculus textbooks during next year. It costs $2 to store one calculus textbook for one year. There is a fixed of $16 for each order. Find the lot size and the number of orders per year that will minimize inventory costs.

Answer: The order size that will minimize inventory costs will be 80 units

Explanation:

The order size which minimizes the balance of holding cost and ordering cost of an inventory is called the economic order quantity.

Given the following;

Demand (D) = 400

Holding cost (H) = $2 per year

Ordering cost (C) = $16 per year

Economic order quantity is given by;

EOQ = Sqrt[ (2 * C * D) : H]

EOQ = sqrt [ (2 * 16 * 400) : 2]

EOQ = sqrt [12800:2]

EOQ = sqrt[6400]

EOQ = 80 units

The order size that will minimize inventory costs - 80 units

Explanation:

The order size that will minimize inventory costs is called the economic order quantity. (EOQ). It is the order quantity that minimizes the balance of holding cost and ordering cost associated with inventory.

EOQ is determined as follows:

EOQ = √ (2 * Co * D) / Ch

Co - Ordering cost per order - $16

Ch - Carrying cost per unit per annum - $2

D - Annual demand - 400

EOQ = √ (2 * 16 * 400) / 2

EOQ = 80 units

The order size that will minimize inventory cost - 80 units