Ordering

# Ordering - Ordering/Holding Cost Trade-Off Total Cost first...

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Ordering/Holding Cost Trade-Off 1 Total Cost first falls as units ordered increase, but then begins to increase. The optimum Ordering Costs = [ F х ( T/Q ) ] Order Quantity ( Q ) \$ Holding Cost = [ H х ( Q /2) ] T = Total inventory units demanded Q = Order quantity F = Fixed Order Cost per order H = Holding Cost per inventory unit D = # days in

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2 A firm estimates the need for: 500,000 tons of scrap metal over a planning period Sales are not seasonal and are stable Ordering Costs are \$20.00/order Holding Costs are \$1.25/ton The price is \$0.50/unit (no discounts offered) The metal can be stored outside and is not insured Optimal Quantity (EOQ) Example Total Cost = [ F х ( T/ Q ) ] + [ H х ( Q /2) ] There exists some Q that minimizes the Total Cost . = [\$20.00 х (500,000 / Q ) ] + [\$1.25 х ( Q /2) ] T = Total inventory units demanded Q = Order quantity F = Fixed Order Cost per order H = Holding Cost per inventory unit D = # days in production period
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Ordering - Ordering/Holding Cost Trade-Off Total Cost first...

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