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Annual demand for a product is 2,000 units. The reorder cost is $10 and the unit cost is $1. You are considering three warehouses (not owned facilities] for storing the product, each with different capacities, and have been quoted the following schedule for holding costs per unit per unit time (HC): Which warehouse should you choose and how much should you order?
Expert Answer
Annual demand, D =2000units. Order cost, S = $10
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Question & Answer: Annual demand for a product is 2,000 units. The reorder cost is $10 and the unit cost is $1. You are…
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EOQ = SQRT (2*D*S/HC)
| warehouse | HC | Lower end of range | Upper end of range | EOQ | comment |
| 1 | 0.4 | 0 | 199 | 316 | Inadequate capacity |
| 2 | 0.2 | 200 | 499 | 447 | Maximum utilization of capacity |
| 3 | 0.15 | 500 | unlimited | 516 | Under utilization of capacity |
While capacity of warehouse 1 is not adequate to hold the EOQ, warehouse 3 would be underutilized. Hence warehouse 2, where maximum capacity utilization is possible is the best option. Hence warehouse 2 should be selected
