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Module 5 (EOQ) Lab 2

The document discusses calculating the economic order quantity (EOQ) and total inventory costs for ordering cement bags. It is given that 240 bags are required yearly, each bag costs Rs. 200, ordering costs Rs. 120 per order, and carrying costs are 20% annually. The optimal EOQ is calculated to be 16 bags, requiring 16 orders per year. The total ordering costs would be Rs. 320 and carrying costs Rs. 300, for a total inventory cost of Rs. 620. Ordering every 16 days minimizes total yearly expenses. A second example calculates the EOQ and yearly expenses for a stocklist supplying 200 units weekly. The optimal EOQ is 456 units every 23 orders

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339 views

Module 5 (EOQ) Lab 2

The document discusses calculating the economic order quantity (EOQ) and total inventory costs for ordering cement bags. It is given that 240 bags are required yearly, each bag costs Rs. 200, ordering costs Rs. 120 per order, and carrying costs are 20% annually. The optimal EOQ is calculated to be 16 bags, requiring 16 orders per year. The total ordering costs would be Rs. 320 and carrying costs Rs. 300, for a total inventory cost of Rs. 620. Ordering every 16 days minimizes total yearly expenses. A second example calculates the EOQ and yearly expenses for a stocklist supplying 200 units weekly. The optimal EOQ is 456 units every 23 orders

Uploaded by

sachinpandhare
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© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
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Module 5 EOQ

FIELD EXERCISE ON EOQ AND BULK PURCHASE OF CEMENT BAGS

Q] Yearly requirement of cement by a large firm is 240 bags. The cost of a cement
bag is Rs 200/- . Lead time is one month and the ordering cost per order is Rs 120/- .
Assume annual carrying cost for inventory 20% of average inventory management .
Find out the Economical Order Quality and the Total inventory cost.
Solution :
1) Calculate annual cost of yearly requirement of cement = 240 bags
cost of our bags = Rs 200

Annual cost of bags = 240 X 200


Annual cost of bags Rs 48,000/-

2) Lead time in one month .


therefore , No of orders : 12 /1 = 12 orders.

3) Calculate no of bags in one lead


No of bags in one lead = 240/12
= 20 Nos.

4) Calculate ordering cost .


Ordering cost = No of orders X ordering cost
= 120 X 20
= Rs 240.

5) Order quantity in Rs = cost of 1 bag x no of bags


= 200 X 20
= Rs 4000.

6) Average inventory usage = 0 + 4000


2
= Rs 2000/-

7) Inventory carrying cost


Inventory carrying cost = usage in Rs. x 0.2
= 2000 X 0.2
= Rs 400
8) Total cost = ordering cost + carrying cost
= 240 + 400
= Rs 640/-

9) Varying the no. of orders for the total inventory cost is calculated as per given
sample given in the table.
Annual Ordering No. of Cost Inventory Inventory Total Remark
No. of Cost bags per Account Usage carrying Cost for order
Order b=ax20 order per order e= a+d cost g=b+e
(a) C=240 d=c x 200 2 f=e x 0.2
a
1 20 240 48,000 24000 4800 4820 1 in year
2 40 120 24,000 12000 2400 2440 6 months
4 80 60 12,000 6000 1200 1280 3 months
8 160 30 6000 3000 600 760 After ½
month
12 240 20 4000 2000 400 640 Monthly
16 320 15 3000 1500 300 620 Every 3
weeks
24 480 10 2000 1000 200 680 Fort-
nightly
48 960 5 1000 500 100 1060 Weekly
60 1200 4 800 400 80 1250 ----

10) EOQ co: ordering cost =Rs20


2 𝑐𝑜.𝑠
Q= √ S: Total annually demand
𝑐𝑢.𝐼
Item in NOS : 240
I : annual carrying cost for
Inventory = 0.2
Cu : unit cost of item =Rs 200/bag
2𝑋20𝑋240
Q= √
200𝑋0.2

Q= 15.49 = 16.
No .of orders = annual usage
Q
= 240
15.49
=15.49 = 16.

No. of bags per order = 240 = 15 NOS


16
Ordering cost = 16 x 20
= Rs 320/-
Inventory usage = 200x15 to
2
= Rs 1500/-

Annual Inventory carrying cost


= 1500x0.2
= Rs 300/-

Total inventory cost = order cost + inventory usage


= 320 + 300
= Rs 620/-

From total cost curve it can be seen that if 16 orders are placed in a year the total
inventory cost is minimum.
Frequency of Ordering = 365
16
= 23 days.

Q) A stock list has to supply 200 units of a commodity to his customer every week. The cost
rate is Rs 100/- per unit from the manufacturer and the ordering cost is Rs 200/ per order.
The carrying cost of inventory is 20% per year of the cost of inventory. Find the economical
order avautity and yearly expenses over the commodity.

Solution
w : ordering cost per cost Rs 200/-
S : Total annual requirement of item
=200 X 52

S = 10400 units.
I : annual carrying cost = 20 % = 0.2
Cu: unit cost of item = Rs 100/ units

2 𝑐𝑎.𝑠 2 𝑋 200𝑋10400
Q=√ =√
𝐶𝑢.𝐼 100𝑋0.2
Q= 456.07 units.

No. of orders = 200 X 52


456
= 22.8 ~ 23 units

Frequency of order = 365


23
= 15.8 days.

Hence, order will have to be placed after every 16th day


Total cost of inventory = Processing cost + carrying cost

= (23x200) + (456 X 100) X 0.2


2
= 4600 + 4560
= Rs 9160/-

Total Yearly Expenses = (200X52) X 100 + 9610

= RS 10,49,610 /- / year.

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