A retailer sells 36,000 units of a product each year. Ordering costs are $80 per order and holding costs are $1.60 per unit per year. If the retailer orders the economic order quantity, what is the total annual ordering and holding cost?

Correct answer: B) $3,036

Explanation

EOQ = square root of (2 x 80 x 36,000 / 1.60) = 1,897 units. Annual ordering cost = 36,000 / 1,897 x 80 = $1,518; annual holding cost = 1,897 / 2 x 1.60 = $1,518. Total = $3,036. At the EOQ, ordering and holding costs are always equal. Using the full order quantity rather than average inventory for holding cost gives $4,554.