A medical clinic dispenses vaccines at a steady rate of 520 doses per month. Each order placed to the vaccine manufacturer incurs a fixed cost of $140. Each vaccine dose held in inventory incurs a holding cost of $3 per year. Required:a. Using the EOQ model, calculate the optimal order quantity, images , and the optimal average cost per year, images. b. Suppose that the fixed cost K increases. Will images increase, decrease, or stay the same? Briefly explain

a) EOQ = 763 vaccines

annual total cost = $2,289.45

b) if order cost increase, then the EOQ will also increase since the total number of orders placed should decrease in order to keep total costs as low as possible.  

Explanation:

EOQ = √(2SD / H)

s = order cost = 140

h= holding cost per unit = 3

d = annual demand = 520 x 12 = 6,240

EOQ = √[(2 x 140 x 6,240) / 3] = 763.15 ≈ 763

annual total cost = [(6,240 / 763) x $140] + [(763 / 2) x $3] = $1,144.95 + $1,144.50 = $2,289.45

if K (I believe K = S) increases to lets says $200:

EOQ = √[(2 x 200 x 6,240) / 3] = 912 units

annual total cost = [(6,240 / 912) x $200] + [(912 / 2) x $3] = $1,368.42 + $1,368 = $2,736.42

if we used EOQ = 763, then:

annual total cost = [(6,240 / 763) x $200] + [(763 / 2) x $3] = $1,635.65 + $1,144.50 = $2,780.15

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