ICANBusiness, Management and FinanceWorking Capital Management2020

Port Harcourt Chemicals Plc uses the Economic Order Quantity (EOQ) model to manage its raw material inventory. Annual demand is 36,000 units, ordering cost is ₦2,500 per order, and the holding cost is ₦50 per unit per annum. What is the EOQ?

A1,800 unitsCORRECT
B1,342 units
C1,500 units
D1,897 units
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Why the answer is A, and why the others tempt you.
EOQ = $\sqrt{\frac{2 \times D \times C_o}{C_h}}$ = $\sqrt{\frac{2 \times 36{,}000 \times 2{,}500}{50}}$ = $\sqrt{\frac{180{,}000{,}000}{50}}$ = $\sqrt{3{,}600{,}000}$ = 1,897 units approximately. Re-checking: 2 × 36,000 × 2,500 = 180,000,000; 180,000,000 ÷ 50 = 3,600,000; √3,600,000 = 1,897. The correct answer is D: 1,897 units.
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