The Burdell Company is a small manufacturing company that uses gear assemblies t

Question

The Burdell Company is a small manufacturing company that uses gear assemblies to produce four different models of mountain bikes. One of these gear assemblies, the "Smooth Shifter", is used for the two most expensive of Burdell's four models, and has an estimated annual demand of 340 units. Burdell estimates the cost to place an order is $40, and the holding cost for each assembly is $60 per year. The company operates 250 days per year. What is the economic order quantity for the Smooth Shifter?

Explanation / Answer

Economic Order Quantity = Sqrt (2 x A x O / C)

Where, A = Annual demand = 340 units

O = Ordering cost per order = $40

C = Holding cost per unit per annum = $60

So, EOQ = Sqrt( 2 x 340 x 40 / 60)

= 21.29 or 22 units.

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