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Solved Problems On EOQ

The document provides examples of calculating economic order quantity (EOQ) using the formula EOQ=√2AB/CxS, where: A is annual usage, B is cost per order, C is cost per unit, and S is storage cost. In 6 examples, values for a company's annual/quarterly demand, ordering costs, unit costs, and storage costs are given to calculate the optimal order quantity that minimizes total inventory costs.

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55K views5 pages

Solved Problems On EOQ

The document provides examples of calculating economic order quantity (EOQ) using the formula EOQ=√2AB/CxS, where: A is annual usage, B is cost per order, C is cost per unit, and S is storage cost. In 6 examples, values for a company's annual/quarterly demand, ordering costs, unit costs, and storage costs are given to calculate the optimal order quantity that minimizes total inventory costs.

Uploaded by

cnagadeepa
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
Download as docx, pdf, or txt
Download as docx, pdf, or txt
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Problems on Economic Ordering Quantity

1. Calculate the economic order quantity for material M. The following details are furnished:
Annual usage = 90000 units
Buying cost per order = Rs. 10
Cost of carrying inventory = 10% of cost
Cost per unit = Rs.50

EoQ=❑√ 2 A B/C x S

A = Annual Consumption

B = Buying cost per order

C = Cost per unit

S = Storage and carrying cost (if it is given in % apply on cost of the material)

EoQ = ❑√ 2 x 90,000 units x 10/(50 x 10 %) = ❑√ 18,00,000/ 5

=❑√ 3,60,000 = 600 units

2) From the following information, calculate Economic Order Quantity and the number of orders
to be placed in one quarter of the year.

(a) Quarterly consumption of materials = 2000 kg


(b) Cost of placing one order = Rs. 50
(c) Cost per unit = Rs. 40

(d) Storage and carrying cost = 8% of average inventory

EoQ=❑√ 2 A B/C x S

A = Annual Consumption ( 2000 for quarterly and for annual = 2000x 4 = 8000)

B = Buying cost per order

C = Cost per unit


S = Storage and carrying cost (if it is given in % apply on cost of the material)

EoQ = ❑√ 2 x 8,000 x 50/(40 x 8 % ) = ❑√ 8,00,000/3.2 = 500 kgs

Number of orders to be placed in one quarter = Material consumption per quarter / EoQ per order

= 2000 kgs / 500

= 4 orders
3. Following information relating to a type of raw material is available:

Annual demand 2400 units

Unit Price Rs. 2.40 - C

Ordering cost per order Rs. 4.00 - B

Storage cost 2% per annum

Interest rate 10% per annum

Calculate Economic Order Quantity.

EoQ=❑√ 2 A B/C x S

A = Annual Consumption

B = Buying cost per order

C = Cost per unit

S = Storage and carrying cost (if it is given in % apply on cost of the material)

Interest rate is not considered and treated as non-storage cost

EoQ = ❑√ 2 x 2400 x 4 /(2.40 x 2% ) = ❑√ 19200/0.048 = 632 units

Note: Interest payment is considered as storage cost and in the storage and carrying cost and the loan is
taken for the purpose of capital expenditure on storage.

EoQ = ❑√ 2 x 2400 x 4 /(2.40 x 12% ) = ❑√ 19200/0.288 = 258 units


4. A Company manufactured 5000 units of a product per month. Cost of placing an order is Rs.
100. The purchase price of raw material is Rs. 10 per kg. The re-order period is 4 to 8 weeks.
The consumption of raw materials varies from 100 kg to 450 kg per week, the average
consumption being 275 kg; the carrying cost of inventory is 20% per annum. Calculate (a) Re-
order Quantity & (b) Re-order level.

EoQ=❑√ 2 A B/C x S

A = Normal consumption of material per week x 52 = 275 per week x 52 weeks

A= 14,300 units of materials

B = 100

C = 10 per unit

S = 20%

a. Re-order quantity or EoQ = ❑√ 2 x 14,300 x 100/(10 x 20 %) = ❑√ 2860000/2 = 1,196 units


b. Re-order Level = Max consumption x maximum re-order period
= 450 x 8
= 3,600 units.

5. A Company uses 2500 units of a material per month. Cost of placing an order is Rs. 150. The
cost per unit is Rs. 20. The re-order period is 4 to 8 weeks. The minimum consumption of raw
material is 100 units whereas the average consumption is 275 units. The carrying cost of
inventory is 20% per annum. Calculate (a) Re-order Quantity & (b) Re-order level.

A = 2500 x 12 (as it is given clearly, that’s why did not take the average consumption)

= 30,000

B = 150

C = 20

S = 20%
a. Re-order quantity or EoQ = ❑√ 2 x 30000 x 150/(20 x 20 %) = ❑√ 90,00,000/4 = 1,500 units
b. Re-order Level = Max consumption x Max ordering period

= 450 x 8 weeks

= 3,600 units.

Average consumption =( Min consumption + max consumption) / 2

275 = (100 + Max cons) /2

275 x 2 = 100 + max consumption = 450 units.

6. XY Co. requires 1500 units of a material per month, each costing Rs. 27. Cost per order is Rs.
150 and the inventory carrying charges work out to 20% of the average inventory. Find out the
economic order quantity and the number of orders per year.

A = 1500 x 12 = 18,000 units


B = 150
C = 27
S = 20%

EoQ = ❑√ 2 x 18,000 x 150/(27 x 20 %) = ❑√ 54,00,000/5.4 = 1,000 units

No of orders per year = No of units required per year / eoq

= 18,000 / 1000 = 18 orders per year

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