High School

Rajesh Indian Market (RIM) is open 12 months out of the year. At RIM, the demand for rice is consistently 200 pounds per month. RIM orders the rice from a distributor in India at an ordering cost of $50 per order. Rice costs $5 per pound, and the annual carrying charge is 15%.

What is the Economic Order Quantity (EOQ)?

A. 566 pounds
B. 164 pounds
C. 163 pounds
D. 26,667 pounds

Answer :

Answer:

A. 566 pounds

Explanation:

Given: Demand for rice is very consistent= 200 pounds per month.

Cost of rice per order= $50 per order.

Rice cost= $5 per pound.

Carrying charge= 15%

EOQ: Economic order quantity (EOQ) is the number of units that company should include in their inventory with each order to reduce cost of inventory.

Now, calculating EOQ.

Formula; EOQ= [tex]\sqrt{\frac{2DP}{C} }[/tex]

D= Demand in units for specified period.

P= relevant ordering costs per order.

C= Relevant carrying cost of one unit in stock for the time period used for D.

EOQ= [tex]\sqrt{\frac{2\times (50)(200\times 12)}{5\times 15\%} }[/tex]

⇒ EOQ= [tex]\sqrt{\frac{2(50)(2400)}{5\times (0.15)} }[/tex]

Opening parenthesis

⇒ EOQ= [tex]\sqrt{\frac{240000}{0.75} }[/tex]

⇒ EOQ= [tex]\sqrt{320000}[/tex]

∴ EOQ= [tex]565.68\ pound \approx 566\ pounds[/tex]

Hence, Economic order quantity is 566 pounds.

Final answer:

The Economic Order Quantity (EOQ) for Rajesh Indian Market (RIM) is found to be approximately 566 pounds, making option a the correct answer.

Explanation:

To calculate the Economic Order Quantity (EOQ) for Rajesh Indian Market (RIM) regarding their rice demand, we use the EOQ formula:

EOQ = sqrt((2DS)/H)

where:

  • D = Demand in units per period (200 pounds/month * 12 months = 2400 pounds/year)
  • S = Ordering cost per order ($50)
  • H = Carrying cost per unit per period ($5 * 15% = $0.75 per pound per year)

Plugging in the values, we get:

EOQ = sqrt((2 * 2400 * 50) / 0.75) ≈ sqrt((240000) / 0.75) ≈ sqrt(320000) ≈ 566 pounds

Therefore, the correct answer is a. 566 pounds.