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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

Economic Order Quantity Practical Problems and Solutions
(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

EOQ Practical Problems and Solutions

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):

Economic Order Quantity Practical Problems and Solutions 2

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

EOQ Practical Problems and Solutions 3

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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