- This topic has 8 replies, 5 voices, and was last updated 2 years ago by John Moffat.
- AuthorPosts
- August 26, 2016 at 6:23 pm #335408
A company is planning to purchase 90,800 units of a particular item in the year ahead. The item is purchased in boxes each containing 10 units of the item, at a price of $200 per box. A safety inventory of 250 boxes is kept.
The cost of holding an item in inventory for a year (including insurance, interest and space costs) is 15% of the purchase price. The cost of placing and receiving orders is to be estimated from cost data collected relating to similar orders, where costs of $5,910 were incurred on 30 orders. It should be assumed that ordering costs change in proportion to the number of orders placed. 2% should be added to the above ordering costs to allow for inflation. Assume that usage of the item will be even over the year.Workings:
To avoid confusion this question is best tackled by working in boxes not units.Co = 5910/30 x 1.02 = 200.94
Ch = 0.15 x 200 = $30 per box
D = 90,800/10 = 9,080 boxes
EOQ = ?(2×200.94) x 9,080/30) = 349 boxes
No. of orders per year = 9,080/349 = 26
26 orders per annum is equivalent to placing an order every 2 weeks (52 weeks / 26 orders).I have only one question, in Co, how did we get 1.02?
August 27, 2016 at 7:48 am #335503Multiplying by 1.02 is the same as adding 2% (for inflation).
If you prefer, then Co (without inflation) is 5910/30 = $197.
Because of inflation add on 2% x 197 which is $3.94
Which gives Co = 197 + 3.94 = $200.94August 28, 2016 at 8:10 pm #335843Thank you sir for the clarification.
August 29, 2016 at 6:40 am #335884You are welcome 🙂
June 13, 2019 at 8:49 am #520358Thanks a lot for your guide. But this solution make more complication on question. You solved in a right way.
October 13, 2021 at 4:22 am #637596The order quantity which minimises total costs is 3,487
This will mean ordering the item every 2 weeks
I have only one question, in Co, how did we get 3,487?October 13, 2021 at 7:55 am #637608We order in boxes and there are 10 in each box.
October 18, 2022 at 10:46 pm #669265Can u plz explain the final answer(3487)by solving it .Iam confused
October 19, 2022 at 10:01 am #669330The working are shown in the very first post (except that the workings there are in boxes, and there are 10 in each box).
I assume that you have watched my free lectures on the calculation of the EQO 🙂
- AuthorPosts
- The topic ‘EOQ’ is closed to new replies.