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.
Answers
Hi,
Answer:
Total annual cost of the exiting inventory = Rs. 2562.5
Savings done after employing the EOQ = Rs. 62.5
Explanation:
Given data:
Company buys in lots of 125 boxes in every 3 months supply.
Cost of each box = Rs. 125
Cost of ordering per order = Rs. 250
Inventory carrying cost = 20% of unit value
To find: total annual cost of existing inventory policy and amount of money that could be saved by employing the economic order quantity.
Case 1: Before employing EOQ
It is a 3 months supply so, in a year there are 4 orders
∴ Ordering cost for 4 orders in a year = 250*4 = Rs. 1000
Now, the carrying cost of average inventory is given by
= 125/2 * 20% * 125
= 125/2 * (20/100) * 125
= 1562.5
Therefore,
The total annual cost of existing inventory policy = (Ordering cost for 4 orders in a year) + (carrying cost of average inventory)
= 1000 + 1562.5
= Rs. 2562.5
Case 2: After employing EOQ
The Economic Order formula,
EOQ = √[(2*D*S)/H]
Where:
D = Annual demand per unit = 125 * 4 = 500
S = ordering cost per purchse order = Rs. 250
H = Holding cost per unit = 20% * 125 = Rs. 25
∴ EOQ = √[(2*500*250)/25] = 100 units
No. of order that should be placed by the company as per the inventory policy = Annual demand / EOQ = 500/ 100 = 5 orders.
Therefore,
Ordering cost for 5 orders @ 250 per order
= 5 * 250
= Rs.1250
Carrying cost of average inventory
= 100/2 * 20% * 125
= 50 * 25
= Rs. 1250
So, the total annual cost after employing EOQ
= Rs. 1250 + Rs. 1250
= Rs. 2500
Hence, from case 1 & case 2 we can now calculate the amount of saving that could be done by employing EOQ.
∴ Savings in the annual cost = Rs. 2562.5 – Rs. 2500 = Rs. 62.5
Hope this helps!!!!!