Question

The Ganges pump company uses about 75000 valves per year and the usage is at 6250
valves per month.
The valves cost Rs.1.50 per unit when bought in quantities and the carrying cost is estimated
to be 20% of average inventory investment on annual basis. The cost to place an order and
process the delivery is Rs. 18.
It takes 45 days to receive from the date of an order and a safety stock of 3250, valves is
required.
a) Determine EOQ and frequency of orders.
b) The order point
c) The most economic order quantity if the valves cost Rs. 4.50 each instead of Rs. 1.50
each.

Answer 1

Determination of Economic Order Quantity (EOQ) through mathematical approach.

Explanation:

a)

EOQ = $\sqrt{2AB} /C$

A=Annual usage of inventory in units

B=Ordering cost per order

C=Carring cost per unit

Given,

A=75000 valves per year

B=Rs.18 per order

C(Rs.1.50 per unit cost x 20%) = Rs 0.30

EOQ=$\sqrt{2X75000X18/0.3}$ = 3000 Units

b)

Order Point = Lead Time (monthly basis) x Normal usage during Lead Time (monthly usage) + Safety Stock

=1.5 x 6250 + 3250

=12625 Units

c)

A=75000 valves per year

B=Rs.18 per order

C(Rs.4.50 per unit cost x 20%) = Rs 0.90

EOQ=$\sqrt{2X75000X18/0.9}$ = 1732 Units

Economic Ordering Quantity using Mathematical approach:

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