Massa Machine Tools expects total sales of $17,000. The price per unit is $8. The firm estimates an ordering cost of $13.28 per order, with an inventory cost of $1.12 per unit. What is the optimum order size?
To determine the optimum order size, we can use the economic order quantity (EOQ) formula. The EOQ formula considers the total demand, ordering cost, and inventory holding cost to identify the order quantity that minimizes total costs.
The formula for EOQ is:
EOQ = √((2 * D * S) / H)
Where:
D = Total demand or total sales (17,000 in this case)
S = Ordering cost per order ($13.28)
H = Holding cost per unit ($1.12)
Now, let's substitute the given values into the formula and calculate the optimum order size:
EOQ = √((2 * 17,000 * 13.28) / 1.12)
EOQ = √(452,480 / 1.12)
EOQ = √403,600
EOQ ≈ 635.58
The optimum order size for Massa Machine Tools is approximately 636 units.