Question

Q.3. A Company has estimates that 36,000 Ring Binders Will be needed next year. The binders have been ordered as needed, a procedure, which has not proved satisfactory. The cost of binder ordered in 100-units lots or more is Rs. 1.25 each. The cost department estimates a cost of Rs.5.60 to place and process and order, further calculations indicate that it costs about 12% of average inventory cost to carry the inventory. The purchasing department believes that the practical limits for ordering binders would be maximum of 45 and minimum of 10 orders a year.
Required:
a. A table indicating the most economical order quantity
b. The difference in the most order quantity if the earning cost is 20% of average inventory.

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Answer 1

a.

The economic order quantity (EOQ) is the order quantity that helps minimize holding costs and order costs .

EOQ = square root of (2 x D x S/H)

Where:

• D represents demand, or how many units of product you need to buy.
• S represents Ordering cost.
• H represents the hcarrying Cost or storage cost per unit of product.

Annual required Qty	36,000
Cost per piece	Rs.1.25	Each
Ordering Cost	Rs.5.6 per order
Carrying Cost	12% of Average Inventory Cost
Carrying Cost per unit	0.15/Unit

EOQ = Square Root of ( 2 * 36000 * 5.6/.15)

= Square Root of 2688000 = 1640 units

b. If the earnings cost is 20 % of Average Inventory

Annual required Qty	36,000
Cost per piece	1.25	Each
Ordering Cost	Rs. 5.6
Carrying Cost	20% of Average Inventory Cost
Carrying Cost per unit	0.25

EOQ = Square Root of ( 2 * 36000 * 5.6/.25)

= Square Root of 1612800 = 1270 units