Economic Order Quantity

Simple EOQ
1. A Company produces fertilizer to sell to wholesalers. One raw material: calcium nitrate is
purchased from a nearby supplier at $22.50 per ton. A Company estimates it will need
5,750,000 tons of calcium nitrate next year. The annual carrying cost for this material is 40%
of the acquisition cost, and the ordering cost is $595.
a. What is the most economical order quantity?
b. How many orders will be placed per year?
c. How much time will elapse between orders?
2. 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.
a. Evaluate the number of Cycle that the store manager should order in each
replenishment lot?
b. How many orders will be placed per year?
c. How much time will elapse between orders?
3. Raj 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.
4. Midwest Precision Control Corporation is trying to decide between two alternate Order Plans
for its inventory of a certain item. Irrespective of the plan to be followed, demand for the item
is expected to be 1,000 units annually. Under Plan 1st, Midwest would use a teletype for
ordering; order costs would be Rs. 40 per order. Inventory holding costs (carrying cost)
would be Rs. 100 per unit per annum. Under Plan 2nd order costs would be Rs. 30 per order.
And holding costs would 20% and unit Cost is Rs. 480. Find out EOQ and Total Inventory
Cost than decide which Plan would result in the lowest total inventory cost?
5. A local TV repairs shop uses 36,000 units of a part each year (A maximum consumption of
100 units per working day). It costs Rs. 20 to place and receive an order. The shop orders in
lots of 400 units. It cost Rs. 4 to carry one unit per year of inventory.
Requirements:
(1) Calculate total annual ordering cost
(2) Calculate total annual carrying cost
(3) Calculate total annual inventory cost
(4) Calculate the Economic Order Quantity
(5) Calculate the total annual cost inventory cost using EOQ inventory Policy
(6) How much save using EOQ
(7) Compute ordering point assuming the lead time is 3 days
6. An item has a monthly demand of 2500 units and each item costs $ 10.00 to purchase it. The
cost of placing order per unit is $ 10.00 while holding cost is estimated to be 2% of the stock
value. If the organization works for 10 months in a year. calculate the followings
a. Economic Order Quantity
b. Number of orders
c. total ordering cost
d. average inventory level
7. A large firm uses an average of 40 boxes of copier paper a day. The firm operates 260
days per year. Storage and handling costs for the paper are $30 a year per box, and it
costs approximately $60 to order and receive a shipment of paper.
a. What order size would minimize the sum of annual ordering and carrying
cost?
b. Compute the total annual cost using your order size from part a.
c. The office manager is currently using an order size of 200 boxes. The partners
of the firm expect the office to be managed ‘in a cost-efficient manner’.
Would you recommend that the office manager use the optimal order size
instead of 200 boxes?
8. The Star Equipment Company purchases 54,000 bearing assemblies each year at a
unit cost of $40.00. The holding cost is $9.00 per unit per year, and the ordering cost
is $20.00.
a. What is the economic order quantity?
b. How many orders should be placed per year?
c. If the lead time is one (01) month, what is the re-order point for the
assemblies?
9. A company requires 1000 units of raw material per month. Ordering cost is Rs 150
per order. Carrying cost in addition to Rs. 3 per unit per year. Cost of raw material is
Rs. 10 per unit. Find EOQ, the number of orders in a year, and the total Inventory
cost.
10. A firm has $ 4 per year carrying cost on each unit of inventory and annual usage of
50,000 units. Ordering cost is $ 100 per order. Calculate economic ordering quantity,
total cost of inventory, annual ordering cost and annual carrying cost?
11. Neha Shah is the purchasing agent for a firm that sells industrial valves and fluid
control devices. One of the most popular valves is the KA1, which has an annual
demand of 6,000 units. The cost of each valve is $120, and the inventory carrying cost
is estimated to be 8% of the cost of each valve. Neha has made a study of the costs
involved in placing an order for any of the valves that the firm stocks, and she has
concluded that the average ordering cost is $45 per order. Furthermore, it takes about
two weeks for an order to arrive from the supplier, and during this time the demand
per week for KA1 valves is approximately 120. Compute the EOQ, ROP, optimal
number of orders per year, and total annual cost for KA1 valves.

Quantity Discount Model (EOQ) Calculations

Analysing a Quantity Discount Summary

1. For each discount, calculate Q*

2. If Q* for a discount doesn't qualify, choose the smallest possible order size to get
the discount
3. Compute the total cost for each Q* or adjusted value from Step 2
4. Select the Q* that gives the lowest total cost

Calculations

1. Demand is 100 units per month. Purchase cost per unit $10. Order cost $20. Holding
cost 10% p.a. of stock value. Calculate the minimum total cost with a discount of 2%
given on orders of 350 and over.
2. A Department Store stocks toy cars. Recently, the store was given a quantity discount.
The normal cost for the cars is $5.00. For orders between 1,000 and 1,999 units, the
unit cost is $4.80, and for orders of 2,000 or more units, the unit cost is $4.75.
Furthermore, the ordering cost is $49 per order, the annual demand is 5,000 race cars,
and the inventory carrying charge as a percentage of cost, I, is 20%, or 0.2. What
order quantity will minimize the total cost?
3. SKY is a bike retailer located in the outskirts of Germany. SKY purchases bikes from
XYZ in orders of 250 bikes which is the current economic order quantity. XYZ is
now offering the following bulk discounts to its customers:

 2% discount on orders above 200 units

 4% discount on orders above 500 units
 6% discount on orders above 600 units

SKY is wondering if the EOQ model is still the most economical and whether
increasing the order size would actually be more beneficial. Following information is
relevant to forming the decision:

 Annual demand is 5000 units

 Ordering cost is $100 per order
 Annual holding cost is comprised of the following:

o 5% insurance premium for the average inventory held during the year
calculated using the net purchase price
o Warehousing cost of $6 per unit
 Purchase price is $200 per unit before discount

4. Dorsey Distributors has an annual demand for a metal detector of 1,400. The cost of a
typical detector to Dorsey is $400. Carrying cost is estimated to be 20% of the unit
cost, and the ordering cost is $25 per order. If Dorsey orders in quantities of 300 or
more, it can get a 5% discount on the cost of the detectors. Should Dorsey take the
quantity discount?
5. An item has an annual demand of 25,000 units, a unit cost of $10, an order
preparation cost of $10, and a carrying cost of 20%. It is ordered on the basis of an
EOQ, but the supplier has offered a discount of 2% on orders of $10,000 or more.
Should the offer be accepted?

6. A company is presently ordering on the basis of an EOQ. The demand is 10,000 units
a year, unit cost is $10, ordering cost is $30, and the cost of carrying inventory is
20%. The supplier offers a discount of 3% on orders of 1000 units or more. What will
be the saving (loss) of accepting the discount?
7. Amco Convenience Store purchases 500 hammers a year for its inventory from its
supplier, who offers pricing at quantity discounts. The quantities and pricing from this
supplier are shown in the following table:
 The cost for Amco to place an order is $60, and the cost to store a hammer in
inventory for a year is $2. What quantity should Amco order?

8. Asbury Products offers the following discount schedule for its 4- by 8-foot sheets of
good-quality plywood:

Home Sweet Home Company orders plywood from Asbury Products. Home Sweet
Home has an ordering cost of $55. The carrying cost is 25%, and the annual demand
is 1,000 sheets. What do you recommend?

Economic Production Quantity (EPQ)

OR
Economic Lot Size (ELS)

ELS 

A manufacturer must determine the production lot size that will result in
minimum production & storage cost.

 Total Annual Cost

 Time Between Orders (TBO)

 Calculations

1. A plant manager of ABC chemical plant must determine the lot size for a particular
chemical that has a steady demand of 30 barrels per day. The production rate is 190
barrels per day, annual demand is 10,500 barrels, setup cost is $200, annual holding
cost is $0.21 per barrel, and the plant operates 350 days per year.
a. Determine the Economic Production Lot Size (ELS)
b. Determine the Total Annual Setup and Inventory Holding Cost for this
item (Total Annual Cost)
c. Determine the time between orders (TBO), or cycle length, for the ELS
d. Determine the Production Time per Lot
2. A manufacturing company uses an EOQ approach in planning its production of parts.
The following information is available. Each part costs Rs. 250 per unit, annual
demand is 60,000 parts, set up costs are Rs. 4,000 per setup and the inventory carrying
cost per month is established at 2% of the average inventory value. When in
production, these parts can be produced at the rate of 400 units per day and this
company works only for 300 days a year. Determine the economic lot size, the
number of production runs per year and the total inventory costs.
3. Brown Manufacturing produces mini-sized refrigeration packs in batches. The firm’s
estimated demand for the year is 10,000 units. It have a daily demand rate of about 60
units per day. It costs about $100 to set up the manufacturing process, and the
carrying cost is about $0.50 per unit per year. When the production process has been
set up, 80 refrigeration packs can be manufactured daily. Each pack costs $5 to
produce. Find the following:
a. How many packs should Brown produce in each batch?
b. Maximum inventory
c. Average inventory
d. Number of setup
e. Total Holding cost
f. Total Setup Cost
g. Total Production Cost
h. Total Cost
4. A toy manufacturer uses 48,000 rubber wheels per year. The firm makes its own
wheels which it can produce at 800/day. The toys are assembled uniformly over the
entire year. Carrying cost is $1/wheel a year and set-up cost for a production run is
$45. The firm operated 240 days in a year. Determine the optimal run size, minimum
total cost for carrying and set-up, cycle time for the optimal run size and the run time.
5. A firm in Sialkot produces 250,000 each world class footballs for both domestic and
international markets. It can make footballs at a rate of 2000 per day. The footballs are
manufactured uniformly over the whole year. Carrying cost is Rs. 100 per football and
Setup cost for a production run is Rs. 2500. The manufacturing unit operates for 250
days per year. Determine the
a. Optimal Run Size.
b. Minimum total annual cost for carrying and setup cost.
c. Cycle time for the Optimal Run Size.
d. Run time by using the formula