INVENTORY MODELS: EOQ
INVENTORY MODELS: EOQ
1. Race Cycles manufactures most components of its bicycles in house. However, some
components are outsourced. Each bicycle needs one seat holder and Race Cycles
manufactures 15625 bicycles a year at a constant rate. The seat holders are
supplied by Seats India Ltd, at a rate of Rs. 100 per unit. From past data it is known
that the cost of placing an order with Seats India is Rs. 160 and the holding cost of
the seat holders is 20% of their purchase price, per unit per year. Assume that Race
Cycles receives the entire quantity ordered in a single consignment. Race Cycles
wishes to compute–
a. the economic order quantity (EOQ) for the seat holder.
b. the maximum and average inventory levels that it will have.
c. time between consecutive orders (in days) and the average number of times
orders are placed in a year of 365 days.
d. The total annual holding costs, order costs and inventory costs that it will incur.
2. VLX Auto Spares is a supplier of auto spare parts to automobile OEMs as well as the
aftermarket. A common component in many of the parts is a small bearing, of which
VLX consumes 73000 units a year. Currently VLX acquires this bearing from
multiple vendors at a cost of Rs. 14.6 per unit. The order cost is Rs. 160 per order
and the annual holding cost of inventory is taken to be 10% of its value. Sriram, the
Production Manager at VLX estimates that instead of outsourcing the bearing, if it is
produced in-house, it will cost only Rs. 14.4 per unit. This includes all capital and
raw material costs, but not the Rs. 600 that the company will have to spend on
setting up a production run each time. A production facility for the bearing can be
created with a capacity that can produce bearings at a rate of 1000 a day. Take a
year to have 365 days.
a. If the production is done in-house, then what is the optimal quantity to produce
in each run?
b. If this quantity is ordered, then how long (in days) would each production run
be? What proportion is it, of the time between orders?
c. Would you advise Sriram to produce in-house or continue outsourcing? Justify.
Prof. Ajith Kumar, XLRI, Jamshedpur 1
INVENTORY MODELS: EOQ
3. Audiovisual Devices Inc. is a multinational firm dealing with projectors that have
demand of 1000 units per year. The holding cost of a projector is Rs. 9000 per unit
per year. Backordering is permitted with a cost of Rs. 3000 per unit per year. The
order cost is Rs. 648 per order. If the EOQ model with backordering is applied, then,
a. For what proportion of time will there be a backlog?
b. What is the optimal order quantity?
c. What are the maximum & average inventory levels?
d. What are the maximum & average backlog levels?
e. What are the optimal annual holding, backordering and order costs?
4. In the basic EOQ model, let us consider the possibility that the price at which the
retailer purchases the SKU from the distributor has a relationship with the quantity.
Consider this example. Tatanagar Pumps purchases 0.5” O-rings from KR Industries.
The company manufactures 7500 pumps a year, each of which consumes six of these
rings. It has been estimated that the cost of carrying the rings (per ring per year) is
35% of the unit price and the cost of ordering the rings is Rs. 50 per order. To
encourage its customers to order in larger quantities, KR Industries runs the
following pricing scheme:
Order quantity Price per
(# rings) ring (Rs.)
1 – 4999 0.21
5000 – 29999 0.20
30000 and above 0.19
Tatanagar Pumps needs your guidance to compute the best order quantity.
Prof. Ajith Kumar, XLRI, Jamshedpur 2
INVENTORY MODELS: EOQ
5. Lisa Plastics purchases metal handles for plastic buckets from Sheetal Metal Works.
The firm produces 4000 buckets a year, each of which, needs one handle. The cost of
holding a handle is 20% of its unit price and the cost of ordering them is Rs. 10 per
order. Sheetal Metals’ pricing policy for Lisa Plastics is as follows:
Unit price
Order quantity
(Rs.)
1 – 199 3.21
200 – 1999 3.19
2000 and above 3.17
EOQ assumptions can be made, where possible. Analyze and find the best order
quantity for Lisa to acquire metal handles from Sheetal Metal and present your
analysis step-by-step.
Prof. Ajith Kumar, XLRI, Jamshedpur 3
