Economic order quantity: is the level of inventory that minimizes the total inventory holding costs and ordering
costs. It is one of the oldest
classical production scheduling models. Economic order quantity refers to that number (quantity) ordered in a single purchase so that the
accumulated costs of ordering and carrying costs are at the minimum level. In other words, the quantity that is ordered at one time should be so,
which will minimize the total of. Cost of placing orders and receiving the goods, and Cost of storing the goods as well as interest on the capital
invested.
The economic order quantity can be determined by the following simple formula:
Formula
EOQ = Economic Order Quantity,
RU = Annual Required Units,
OC = Ordering Cost for one Unit
UC = Inventory Unit Cost,
CC = Carrying Cost as %age of Unit Cost
1. Demand for the Child Cycle at Best Buy is 500 units per month. Best Buy incurs a fixed order placement, transportation, and
receiving cost of Rs. 4,000 each time an order is placed. Each cycle costs Rs. 500 and the retailer has a holding cost of 20 percent.
Evaluate the number of computers that the store manager should order in each replenishment lot?
2. ABC Ltd. uses EOQ logic to determine the order quantity for its various components and is planning its orders. The Annual
consumption is 80,000 units, Cost to place one order is Rs. 1,200, Cost per unit is Rs. 50 and carrying cost is 6% of Unit cost. Find
EOQ, No. of order per year, Ordering Cost and Carrying Cost and Total Cost of Inventory.
EOQ = 200 Units
3. Calculate EOQ from the following?
Consumption during the year = 600 units Ordering cost Rs. 12 per order
Carrying cost 20% Selling Price per unit Rs. 20
Economic Order Quantity = 379 Units
4. A manufacturer buys certain equipment form suppliers at Rs. 30 per unit. Total annual needs
are 800 units. The following further data are available:
Annual return on investments 10% Rent, insurance, storing per unit per year Rs. 2
Cost of placing an order Rs. 100
Required: EOQ
EOQ = 200 Units
5. From the figures given below, calculate Economic Order Quantity (EOQ) and Total cost at
EOQ?
Total consumption of material per year 10,000 kgs Buying cost per order Rs. 50
Unit cost of material Rs. 2 per kg Carrying and storage cost 8%
EOQ = 2,500 Units
Total Inventory Cost = [Fixed ordering cost (F) * Number of Order per year N] + [Carrying Cost
(C)* EOQ/2]
Total Inventory Cost = [50 * 10,000/2,500] + [(2*0.08)* 2,500/2]
Total Inventory Cost = 200 + 200
Total Inventory Cost = Rs. 400
6. Particulars relating to an inventory are as below:
Annual consumption -6000 units (in 360 days)
Cost per unit - $ 1
Ordering cost - $ 6 per order
Inventory carrying charge – 50%
Normal lead time = 30 days
Safety stock – 60 days consumption
Find out-(a) each time, how much should be ordered, (b) when the order should be placed, (c) what
should be the ideal inventory level immediately before the delivery of material ordered is received, (d)
each many times orders for EOQ should be placed in a year.
Solution:
EOQ = √ (2CoO)/Cc
Where Co = 6000 units, O = $ 6 per order, Cc = 50% of $1 = $ 0.50
EOQ = √ (2*6000*6)/0.40
= 1200 units.
Hence each time 1200 units should be ordered.
Re-ordering level= Safety stock+ Lead time consumption
= (60+30) or 90 day’s consumption
= 90*(6000/360) = 1500 units
Hence, an order should be placed when the stock reaches 1500 units
The ideal inventory level, immediately before the delivery of material ordered is received is the safety
stock level, which represents 60 days consumption i.e.
60*(6000/360) = 1000 units.
No of times orders for EOQ to be placed in a year = 6000/1200 = 5 times
7. Calculate (a) Re-ordering level, (b) Maximum level, (c) Minimum level & (d) Danger
level, from the given below details:
Re-ordering quantity is to be calculated on the basis of the following information:
Cost of placing a purchase order is $ 40
No of units purchased during the year are 10000 units
Purchase price per unit inclusive of transportation cost is $ 100
Annual cost of storage is $ 5
Details of lead time: Average 20 days, Maximum 30 days, Minimum 12 days. For emergency
purchases 8 days.
Rate of consumption: Average 30 units per day, maximum 40 units per day.
Solution:
(a) Re-order level = Maximum usage per period * Maximum delivery period
= 40 units per day * 30 days = 1200 units
(b) Maximum level = Re-order level + Re-order quantity-(Minimum Usage*Minimum delivery
period) [Working notes 1 & 2]
=1200 units+ 400 units- (20 units per day*12days)
= 1360 units
(c) Minimum level = Re-order level-(Average usage*Average delivery period)
= 1200 units – (30 units*20days)
= 600 units
(d) Danger level = Average usage*Lead time for emergency purchase
=30 units* 8 days
=240 units
Working Notes: (1) Re-ordering quantity = EOQ = √ (2CoO)/Cc
= √ (2*10000*40)/5 = 400 units
(2) Minimum Usage: - Average usage is 30 units per day. Total of minimum & maximum usage
is (30 units *2) or 60 units per day. Since maximum usage is 40 units per day, minimum usage is
(60-40) units or 20 units per day.
