IIA-CIA-Part3 Exam Dumps | Using an EOQ analysis (assuming a constant demand), it is determined that the optimal order quantity

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Question 127/152

Using an EOQ analysis (assuming a constant demand), it is determined that the optimal order quantity is 2,500. The company desires a safety stock of 500 units. A 5-day lead time is needed for delivery. Annual inventory holding costs equal 25% of the average inventory level. It costs the company US $4 per unit to buy the product, which it sells for US $8. It costs the company US $150 to place a detailed order, and the monthly demand for the product is 4,000 units.
Annual inventory holding costs equal:

A. US$750

B. US$1,250

C. US$1,750

D. US$2,250

Correct Answer: C

Given that demand is constant and the EOQ is 2,500 units, the average inventory level without regard to safety stock is 1,250 units (2.500 + 2). Adding safety stock results in an average level of 1,750 units (1,250 + 500). Given also that annual holding costs are 25% of average inventory and that unit cost is US $4. total annual holding cost is US $1,750 [(1,750 units x US $4) x 25%].

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