## Problem No.1

The john equipment company estimates its carrying cost at 15% and its ordering cost at $90 per order. The estimated annual requirement is 78,000 units at a price of $4 per unit.

**Required:**

(i). What is the most economical no. of units to order?

(ii). No. of orders to be placed in a year.

(iii). About how often will an order need to be placed?

### Solution

**(i). Economical No. or Units to Order:**

Annual requirement = 48,000 units

Ordering cost = $9 per order

Carrying cost = 15% of per-unit cost.

Per unit cost = $4 per unit

**(ii). No. of orders to be placed in a year:**

= Annual requirement / EOQ

= 48,000 units / 1,200 units

= 40 orders

**(iii). About how often will an order need to be placed (i.e. frequency of orders):**

Frequency of orders = No. of days in one year / No. of orders

= 360 days / 40 orders

= 9 days

## Problem No. 2

Raymond Bro. has been buying a given item in lots of 900 units, which is three months supply. The cost per unit is $12 and the order cost is $16 per order and the carrying cost is 25%.

**Required:**

How much Raymond Bro.can save per year by buying in most economical quantities.

### Solution

**Working: Computation of Annual Requirement:**

As 900 units are three months supply (i.e. consumption), per month requirement is:

Requirement Per Month: 900 units / 3 months = 300 units

Therefore:

Annual requirement = 300 units x 12 months = 3,600 units

**Economic Order Quantity (EOQ):**

No. of Orders = 3,600 units / 900 units

= 4 orders

= 3,600 units / 196 units

= 18 orders approx.

Ordering Cost = 4 orders x $16 per order

= $64

and in case of EOQ:

= 18 orders x $16 per order

= $288

Average Inventory = 900 units / 2

= 450 units

and in case of EOQ:

= 196 units / 2

= 98 units

Carrying cost = $3 x 450 units

= $1,350

and in case of EOQ:

= $3 x 98 units

= $294

Total cost = $64 + $1,350

$1,414

and in case of EOQ:

=$288 + $294

= $582

saving = $1,414 – $582

= $832

## Problem No. 3

A manufacturing company placed an order of 24,000 units semiannually at a price of $20 per unit. Its carryng cost is 15% and the order cost is $12 per order.

**Required:**

(i). What is the most economical order quantity?

(ii). How many orders need to be placed?

### Solution

No. of orders per year = Annual Requirement / EOQ

= 48,000 units / 620 units

= 77 orders approximately

**Computation of Annual Requirement:**

24,000 units are ordered semiannually, therefore:

Annual requirement = 24,000 units x 2 = 48,000 units.