# Economic Order Quantity (EOQ) Practical Problems and Solutions

## 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:

Also Check:  Reorder Level of Stock

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.

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