Make your own free website on Tripod.com

ECONOMIC ORDER QUANTITY

Answers

Home | What is Economic Order Quantity? | Its Cost Components | EOQ Model with Purchases | Assumptions of the Model | Optimizing Economic Order Quantity | Graphical Solutions | Sample Problems | Answers

Answers
  1. Annual Demand = 624,000 units, Ordering Cost = $15.00 per order, Holding Cost = $0.495 per unit.
    Ch =  $   0.495 /unit
    Co =  $   15.00 /order
    D =   624,000 units/year
    EOQ =  6,149.65 units/order =  6,150 units/order
    Orders/yr =     101.47 orders/year =     102 orders/year
    cylce time days =        3.60 days/order =        4 days/order
     
    1. ABC should order 6,150 units per order.
    2. ABC should place 102 orders per year.
    3. ABC should place an order every 3.6 days or twice a week.

  2. Average Weekly Demand = 500 units, Annual Demand = 26,000 units, Ordering Cost = $16.88 per order, Holding Cost = $.25 per unit.
    Ch =  $   0.250 /unit
    Co =  $   16.88 /order
    D =     26,000 units/year
    EOQ =  1,873.50 units/order =  1,874 units/order
    Orders/yr =       13.88 orders/year =       14 orders/year
    cylce time days =       26.30 days/order =       26 days/order
 
    1. Joe should order 1,874 units per order.
    2. Joe should place 14 orders per year.
    3. Joe should place an order every 26.3 days.

 

  1. R & B Beverage Company 
    Ch =  $   0.750 /unit
    Co =  $   20.00 /order
    D =       3,600 units/year
    EOQ =     438.18 units/order =     439 units/order
    Orders/yr =        8.22 orders/year =        9 orders/year
    cylce time days =       44.43 days/order =       44 days/order

     

  2. R & B Beverage Company 
    q Holding Ordering Total

    438

     $     164.32  $      164.32  $     328.63

    Total Inventory Costs = $329.63
    Ordering Cost = $164.32
    Holding Cost = $164.32

 
  1. The XYZ Company 
    EOQ =    1,095.45 units/order =        1,096 units/order
    Orders/yr =        10.95 orders/year =             11 orders/year
    cylce time days =        22.82 days/order =             23 days/order
    reorder point =       240.00 units =           241 units
    Holding Cost =  $   273.86 as adjusted  $   274.00
    Orderig Cost =  $   273.86 as adjusted  $   273.72
    Total Inventory Cost =  $   547.72 as adjusted  $   547.72
    1. EOQ = 1,096 units
    2. Cycle time is 23 days or 1 month.
    3. Total annual inventory holding and ordering costs = $273.86 
    4. The reorder point for the XYZ Company = 240 units

 

  1. The XYZ Company 
    EOQ =    1,095.45 units/order =        1,000 units/order
    Orders/yr =        10.95 orders/year =             13 orders/year
    cylce time days =        22.82 days/order =             19 days/order
    reorder point =       240.00 units =           241 units
    Holding Cost =  $   273.86 as adjusted  $   250.00
    Orderig Cost =  $   273.86 as adjusted  $   300.00
    Total Inventory Cost =  $   547.72 as adjusted  $   550.00


    1. The additional cost is only = $2.28: 
    2. I would you recommend in favor of the 1,000-unit order quantity because the cost increase is minimal for a range of quantities around the EOQ level and the adjusted quantity probably makes more sense for the additional cost of only $2.28..
    3. Reorder point = 241 units; The reorder point is unaffected by the change in inventory policy because it is a function of demand and lead time not order quantity.  Provided the policy keeps the initial  inventory above the reorder point.


  2. Tele-Reco's inventory 
    EOQ =        15.95 units/order =             16 units/order
    Orders/yr =        15.04 orders/year =             16 orders/year
    cylce time days =        24.26 days/order =             23 days/order
    reorder point =          3.29 units =               4 units
    Holding Cost =  $1,053.00 as adjusted  $1,056.00
    Orderig Cost =  $1,053.00 as adjusted  $1,050.00
    Total Inventory Cost =  $2,105.99 as adjusted  $2,106.00

    1. EOQ = 16 units
    2. Estimated annual cost for inventory and ordering costs = $2,105.99
    3. Cycle time = 23 days.
    4. Reorder point = 4 units.
    5. The effect of a cost increase would increase holding cost per unit and reduce the optimal level of inventory.

  3. DIG4OIL Inc
    1. The new EOQ = 72 units.
    2. Economic Order Quantity is defined as, , where D is annual demand, Co is ordering cost per order, and Ch is holding cost per unit.  If we define holding cost as an allocated cost defined by  , where I is the holding cost allocation rate and C is unit cost then, .  When I equal .22 DIG4OIL Inc. reported a value for Q of 80 then, .  Squaring both sides yields and multiplying both sides by .22 yields , therefore if I is increased to .27 the resulting Q can be computed as , which equal 72.21 or approximately 72.
    3. Generally, increases in demand and ordering costs will increase EOQ and increases in units costs or holding costs will decrease the EOQ.


  4. Click here to see a sample graph.

back to top