Question

A firm consumes 90000 units of a certain item of raw material in its production process annually.It costs rs .3 per unit the cost per purchase order is rs 300 and the inventory carrying cost is 20% per year.What is eoq

Answer 1

If the cost of 90000 units of raw material per unit is rs .3, the cost per purchase order is rs 300 and the inventory carrying cost is 20% per year, then the EOQ is 9487 units.

Explanation:

The formula for economic order quantity or EOQ is given as,

EOQ = $\sqrt{\frac{2DS}{H}}$

Where

D = Annual demand in units = 90000

S = Ordering cost per purchase order i.e., cost of placing and receiving 1 order = Rs. 300

H = Holding cost or Carrying Cost = [Inventory carrying cost(%)] * [Cost of material per unit] = 20% * Rs. 3 = Rs. 0.6

Now, substituting the given values in the EOQ formula, we get

EOQ = $\sqrt{\frac{2*90000*300}{0.6}}$

⇒ EOQ = √[90000000]

⇒ EOQ = 9486.83 units ≈ 9487 units

Thus, the EOQ is 9487 units.

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Also view:

Company buys in lots of 125 boxes, which is a 3 month’s supply. Cost per box Rs. 125 and ordering cost is Rs. 250/order. Carrying cost is 20% of unit value p.a. What is the total annual cost of the existing inventory policy? How much money could be saved by employing EOQ.

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Answer 2

EOQ = 9,486.83 (Approx)

Explanation:

Given:

Total number of unit (D) = 90,000 units

Cost per units = R.s 3

Order cost (S) = R.s 300

Inventory carrying cost is 20%

Computation of holding Cost:

Holding Cost(H)= 3 × inventory carrying cost

Holding Cost(H) = 3 × 20% = 0.6

Computation of eoq:

$eoq=\sqrt{\frac{2DS}{H} }\\\\eoq=\sqrt{\frac{2(300)(90,000)}{0.6} }\\\\eoq=9,486.83298$

EOQ = 9,486.83 (Approx)

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