Discussion
A local tyre distributor expects to sell approximately 9600 steel belted radial tyres next year. Annual carrying cost is Rs. 16 per tyre and ordering cost is Rs. 75. The economic order quantity of the tyres is
Answer: C
The economic order quantity is 300 tyres.
With annual demand D, ordering cost per order \(C_{o}\) and carrying cost per unit per year \(C_{h}\):
\[ \begin{aligned} EOQ &= \sqrt{\frac{2DC_{o}}{C_{h}}} \\ &= \sqrt{\frac{2 \times 9600 \times 75}{16}} \\ &= \sqrt{90000} = 300 \end{aligned} \]
At this quantity the annual ordering cost (32 orders × Rs. 75 = Rs. 2400) equals the annual carrying cost (150 average tyres × Rs. 16 = Rs. 2400), which is the check. 212 is what you get by dropping the factor 2, and 64 comes from inverting the cost ratio; 1200 does not follow from the formula.
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