Question

Abc corporation has got a demand for particular part at 10,000 units per year. The cost per unit is rs.2 and it costs rs.36 to place an order and to process the delivery. The inventory carrying cost is estimated at 9% of average inventory investment. Determine (i) economic order quantity, (ii) optimum number of orders to be placed per annum, (iii) average annual ordering cost, (iv) average annual carrying cost and (v) minimum total cost of inventory per annum.

Answer 1

To determine the number of orders we simply divide the total demand (D) of units per year by Q, the size of each inventory order. We then multiply this amount by the fixed cost per order (F), to determine the ordering cost

Answer 2

(i) Economic order quantity.

$\sqrt{ \frac{2 \times d \times s}{h} }$

here :-

d = annual demand

s = cost of placing order

h = holding cost per unit(i*c)

i = carrying cost rate

c = cost per unit

i = 9%*2

$\sqrt{ \frac{2 \times 10000 \times 36}{0.18} }$

$\sqrt{4000000}$

EOQ = 2000

(ii) Optimum number of orders to be placed per annum

Number of order per year = Demand / EOQ

= 10000/2000

= 5

Number of order per year = 5

(iii) Average annual ordering cost

number of orders * ordering costs.

= 5*36

= 180

Average annual ordering cost = 180

(iv) Average annual carrying cost

carrying cost / total inventory value * 100

= 9%/2*100

= 18

Average annual carrying cost = 18

(v)Minimum total cost of inventory per annum.

TC = PC + OC + HC

TC is the Total Cost

PC is Purchase Cost

OC is Ordering Cost

HC is Holding Cost

= 2+36+9%

= 41.42.

Minimum total cost of inventory per annum = 41.42.