Question

A company makes bicycles. It produces 850 bicycles a month. It buys the tires for bicycles from a supplier at a cost of Rs.60 per tire. The company’s inventory carrying cost is estimated to be 15% of cost and the ordering is Rs.90 per order. Compute EOQ.

Answer 1

D = annual demand = (2 tires per bicycle) x (450 bicycles per month) x (12 months in a year)

= 10,800 tires

S = ordering cost = $50 per order

H = carrying cost = (15%) x ($20 per unit)

= $ 3.00 per unit per year

EOQ = Square root of { (2 x 10,800 x $50) / $3 = Square root of 400,000 = 600 tires

The company should order about 600 tires each time it places an order.

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