Question

?Tiger Corporation purchases 1 180 000 units per year of one component. The fixed cost per order is ?$24. The annual carrying cost of the item is 25.6?% of its ?$2.25 cost.

a. Determine the EOQ if? (1) the conditions stated above? hold, (2) the order cost is zero rather than ?$24?, and? (3) the order cost is ?$24 but the carrying cost is ?$0.01.

b.??What do your answers illustrate about the EOQ? model? Explain.

Answer 1

a. EOQ = SQRT(2 x S x O/C)
Here S = 1,180,000, O = 24, C = 0.256 x 2.25 = 0.576

i) Stated Conditions, EOQ = SQRT ( 2 x 1,180,000 x 24/0.576) = 9,916.
ii) Order Cost = 0, EOQ = SQRT(2 x S x 0/C) = 0
iii) C =0, EOQ = SQRT(2 x S x O/0) -> ?
EOQ approaches infinity. This suggests the firm should carry the large inventory to minimize ordering costs.

b) The EOQ model is most useful when both carrying costs and ordering costs are present. As shown in part (a),
when either of these costs are absent the solution to the model is not realistic. With zero ordering costs the firm is
shown to never place an order.