Question

manufacturer has to supply his customers 3600 units of his product per year. shortages are not permitted inventory carrying cost accounts Rs 1.2per unit per annum. setup cost per run is Rs80 find 1)EOQ 2)optimum no. of order per annum 3)average annual inventory cost minimum 4)optimum period is supply per optimum order​

Answer 1

Concept:

Companies determine their ideal order size by performing a calculation known as the economic order quantity (EOQ), which enables them to meet demand without going overboard. For the purpose of reducing holding costs and surplus inventory, inventory managers calculate EOQ.

Given:

Annual units = 3600

Carrying cost = 1.2 per unit per annum

Setup cost = 80 per run

Find:

EOQ

Optimum no. of order per annum

Average annual inventory cost minimum

Optimum period of supply per optimum order​

Answer:

EOQ = $\sqrt{2*3600*80/1.2}$ = 693 UNITS

No. of orders placed = 3600/693 = 5.1 or 5 orders

Setup cost @ 80 for 5 orders = 80*5 = 400

Average inventory cost per year = (693*1.2)/5 = 166.32

Minimum average yearly cost = 400+166.32 = 566.32

Optimal period of supply per optimum order = $\sqrt{2*3600/80*1.2}$ = 8.67

Explanation:

EOQ(Economic Order Quantity) = $\sqrt{2ab/cs}$

where,

a = unit per year

b = setup cost

cs = carrying cost

No. of orders placed = units per annum /EOQ

Minimum average yearly cost = setup cost + average inventory cost per year

Optimal period of supply per optimum order = $\sqrt{2a/bc}$

where,

a = unit per year

b = setup cost

cs = carrying cost

The optimal order quantity to reduce inventory expenses, such as holding costs, shortage costs, and order costs is called an economic order quantity, or EOQ.

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