Question 20.4: The EOQ Based on our previous two examples, what size orders...

Fundamentals of Corporate Finance Standard Edition

The EOQ

Based on our previous two examples, what size orders should Thiewes place to minimize costs? How often will Thiewes restock? What are the total carrying and restocking costs? The total costs?

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We know that the total number of pairs of boots ordered for the year (T) is 600. The restocking cost (F) is $20 per order, and the carrying cost (CC) is $3. We can calculate the EOQ for Thiewes as follows:

EOQ=\sqrt{\frac{2T\times F}{CC} }  =\sqrt{\frac{(2\times 600)\times \$20}{3} } =\sqrt{8,000} =89.44  units

Because Thiewes sells 600 pairs per year, it will restock 600 / 89.44 = 6.71 times. The total restocking costs will be $20 × 6.71 = $134.16. Average inventory will be 89.44 / 2 = 44.72. The carrying costs will be $3 × 44.72 = $134.16, the same as the restocking costs. The total costs are thus $268.33.

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