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    NB: When The Holding Cost Per Unit Is Not Given, We Usually Take It To Be A Percentage of Purchase Price (C) Per Unit

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    Vans Tee
    This document discusses the economic order quantity (EOQ) model and provides examples of how to calculate EOQ and total inventory costs. The EOQ formula is given as the square root of 2 times annual demand times ordering cost divided by holding cost per unit. Holding cost is sometimes given as a percentage of purchase price. Four examples are worked through step-by-step to demonstrate calculating EOQ and total costs given values for annual demand, ordering cost, purchase price, and holding cost.

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    Download as PDF, TXT or read online from Scribd

    NB: When The Holding Cost Per Unit Is Not Given, We Usually Take It To Be A Percentage of Purchase Price (C) Per Unit

    Uploaded by

    Vans Tee
    619 views3 pages
    This document discusses the economic order quantity (EOQ) model and provides examples of how to calculate EOQ and total inventory costs. The EOQ formula is given as the square root of 2 times annual demand times ordering cost divided by holding cost per unit. Holding cost is sometimes given as a percentage of purchase price. Four examples are worked through step-by-step to demonstrate calculating EOQ and total costs given values for annual demand, ordering cost, purchase price, and holding cost.

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    EOQ questions

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    This document discusses the economic order quantity (EOQ) model and provides examples of how to calculate EOQ and total inventory costs. The EOQ formula is given as the square root of 2 times annual demand times ordering cost divided by holding cost per unit. Holding cost is sometimes given as a percentage of purchase price. Four examples are worked through step-by-step to demonstrate calculating EOQ and total costs given values for annual demand, ordering cost, purchase price, and holding cost.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    619 views3 pages

    NB: When The Holding Cost Per Unit Is Not Given, We Usually Take It To Be A Percentage of Purchase Price (C) Per Unit

    Uploaded by

    Vans Tee
    This document discusses the economic order quantity (EOQ) model and provides examples of how to calculate EOQ and total inventory costs. The EOQ formula is given as the square root of 2 times annual demand times ordering cost divided by holding cost per unit. Holding cost is sometimes given as a percentage of purchase price. Four examples are worked through step-by-step to demonstrate calculating EOQ and total costs given values for annual demand, ordering cost, purchase price, and holding cost.

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    EOQ by Madam Eunah

    2 𝐷𝐶𝑜
    E.O. Q=√ where D=The annual demand
    𝐶ℎ
    Co= Ordering cost per order

    Ch=Holding cost per unit per annum (Storage cost per unit)
    C = Purchase price per unit.
    EOQ/Q=order quantity
    Nb: When the Holding cost per unit is not given, we usually take it to be a percentage of purchase price (C)
    per unit.

    Example 1
    A company uses 5000 pieces of raw materials per annum, the cost of each being sh. 20, the cost per order
    is sh. 80 and the cost of storage is 10% of the value of the item. Calculate EOQ and the total cost of stock.
    Solution
    D = 5000
    Co= 80
    C=20
    Ch = 10% x 20 =2

    2𝐷𝐶𝑜 2𝑥5000𝑥80
    Therefore EOQ = √ EOQ = √ = 632.46 EOQ = 632 pieces
    𝐶ℎ 2

    Total cost of inventory =Total ordering cost + Total holding cost


    Where:
    a. Total Ordering cost-This is the cost incurred in getting an order to the firm facility storage. They
    include Cost of telephone charges, cost of issuing the purchase order offloading and inspection of
    goods etc.
    Ordering cost=No of orders x cost per order
    Annual demand(D)
    Nb: Number of orders= Quantity(Q)

    D
    So, Ordering cost = Q X Co

    5000
    = X 80
    632

    =632.91
    EOQ by Madam Eunah

    b. Total Holding cost -This is the cost incurred as a result of maintaining inventory items in a firm.
    They include: Cost of insurance of goods
    Security cost on the goods Storekeepers’ salaries etc.
    Holding cost=Average stock x Holding cost per unit
    𝑄
    = X Ch
    2
    632
    = x 2 = 632.91
    2

    Total cost = Total Ordering cost + Total Holding cost (Where discounts are not provided)
    D 𝑄
    = X Co + X Ch =632.91+632.91=1265.82
    Q 2

    Example 2
    ABC requires 2000 units of a component in its manufacturing process in the coming year. The unit cost is
    sh. 50 and cost of each order is sh. 50 and holding cost per unit is sh. 15 per year + 10% opportunity cost.
    Required:
    i) Economic order quantity and total relevant cost.

    D = 2000
    Co = 50
    C=50
    Ch = 15 + 10% x 50 = 20

    2𝐷𝐶𝑜 2𝑥2000𝑥50
    EOQ =√ EOQ = √ =100
    𝐶ℎ 20

    ii) Total relevant cost of inventory = Ordering cost + Holding cost


    D 𝑄
    = X Co + X Ch
    Q 2

    2000 100
    = x 50 + x 20
    100 2

    =2000
    EOQ by Madam Eunah

    Example 3
    A company uses 14450 units of material X each year. Which costs sh.120 for each unit. The cost of placing
    an order is sh. 80 for each order. The cost of holding inventory each year is 10% of purchase cost.
    Required:
    Computed the Economic order quantity and the total relevant cost of material.
    2𝐷𝐶𝑜
    EOQ = √ 𝐶ℎ
    Where:
    D=14450
    Co=80
    C=120
    Ch =10% x 120 =12
    2 𝑋 80 𝑋 14450
    EOQ= √ =439 Units
    12

    Example 4
    A company uses 50,000 units per annum which are acquired at sh.100 each. The ordering and
    holding costs are sh. 150 per order and carrying cost is sh. 15% of the cost of the inventory per
    annum.
    Required:
    Calculate the economic Order quantity and the total cost
    Solution
    Nb: Carrying cost is also called the holding/storage cost.

    2𝐷𝐶𝑜 2𝑥50000 𝑥150


    EOQ = √ EOQ = √ =1,000 units
    𝐶ℎ 15

    Where: D=50,000
    Co=sh. 150
    C=100
    Ch= 15 % x 100 =15
    Total cost = Total Ordering cost + Total Holding cost
    D 𝑄
    = X Co + X Ch
    Q 2
    50,000 1000
    = X 150 + X 15 =15,000
    1000 2

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