Economic Order Quantity

3/31/22, 11:14 PM Economic Order Quantity - Examples - Formula - Questions
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Economic Order Quantity

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Economic Order Quantity is the level of inventory that minimizes
the total inventory holding costs and ordering costs. It is one of the
oldest classical production scheduling models. Economic order
quantity refers to that number (quantity) ordered in a single purchase
so that the accumulated costs of ordering and carrying costs are at
the minimum level. In other words, the quantity that is ordered at
one time should be so, which will minimize the total of. Cost of
placing orders and receiving the goods, and Cost of storing the goods
as well as interest on the capital invested.
The economic order quantity can be determined by the following
simple formula:
Formu la
EOQ = Economic Order Quantity,
RU = Annual Required Units,
OC = Ordering Cost for one Unit
UC = Inventory Unit Cost,
CC = Carrying Cost as %age of Unit Cost
>> Practice Economic Order Quantity Problems and
Solutions.
Example 1:
Demand for the Child Cycle at Best Buy is 500 units per month.
Best Buy incurs a fixed order placement, transportation, and
receiving cost of Rs. 4,000 each time an order is placed. Each cycle
costs Rs. 500 and the retailer has a holding cost of 20 percent.
Evaluate the number of computers that the store manager should
order in each replenishment lot?
Solutions.
Example 2:
ABC Ltd. uses EOQ logic to determine the order quantity for its
various components and is planning its orders. The Annual
consumption is 80,000 units, Cost to place one order is Rs. 1,200,
Cost per unit is Rs. 50 and carrying cost is 6% of Unit cost. Find
EOQ, No. of order per year, Ordering Cost and Carrying Cost and
Total Cost of Inventory.
>> Question and Answers: Economic Order Quantity
Problems and Solutions
Example 3:
Midwest Precision Control Corporation is trying to decide between
two alternate Order Plans for its inventory of a certain item.
Irrespective of the plan to be followed, demand for the item is

st
expected to be 1,000 units annually. Under Plan 1 , Midwest would
use a teletype for ordering; order costs would be Rs. 40 per order.
Inventory holding costs (carrying cost) would be Rs. 100 per unit per
nd
annum. Under Plan 2 order costs would be Rs. 30 per order. And
holding costs would 20% and unit Cost is Rs. 480. Find out EOQ
and Total Inventory Cost than decide which Plan would result in the
lowest total inventory cost?
Solutions.
Example 4:
A local TV repairs shop uses 36,000 units of a part each year (A
maximum consumption of 100 units per working day). It costs Rs.
20 to place and receive an order. The shop orders in lots of 400
units. It cost Rs. 4 to carry one unit per year of inventory.
Requirements:
(1) Calculate total annual ordering cost
(2) Calculate total annual carrying cost
(3) Calculate total annual inventory cost
(4) Calculate the Economic Order Quantity
(5) Calculate the total annual cost inventory cost using EOQ
inventory Policy
(6) How much save using EOQ
(7) Compute ordering point assuming the lead time is 3 days
Solutions.
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31 Comments
Maha on December 2, 2021 at 12:16 pm
2. Following information relating to a type of raw material is

available: Annual demand 2,400 units
Unit priceRO 2,400
Ordering cost per order RO .400
Storage cost: 2 % per annum
Interest rate: 10% per annum
Calculate EOQ and the number of orders that are required to

be placed during the year.
Reply
Obuh Victor on August 29, 2021 at 7:46 pm
A car manufacturing company produces 450 cars in one

month. It buys the engines for cars from a supplier at a cost
of ₦20 per engine. The company’s inventory carrying cost is
estimated to be 15% of cost and the ordering is ₦50 per
order. You are required to:
i. Compute the average annual ordering cost.
ii. Compute the average inventory
Please assist me with a solution to this question
Reply
intrepid on September 4, 2021 at 4:44 am
i) EOQ= √(2×5400×50)÷3
EOQ=424 units
ii) Average Inventory=EOQ/2
=424/2= 212 units
Reply
mk on July 22, 2021 at 12:27 pm
I. Calculate the Economic Order Quantity and number of

orders to be placed in a year for tablet clarithromycin 500 mg
used in a tertiary car,e center.
Annual consumption of tablet clarithromycin 500 mg is 470

no. and it is usually purchased at the cost of Rs. 150 (tab 4s).
The buying cost per order is Rs. 170. Its carrying and storage
cost is Rs. 112.
Can you please help me
Reply
saqib Ali on July 18, 2021 at 11:13 am
The Florida company has obtained the following costs and

other data pertaining to one of its materials:
Workign days per year 250
Normal use per day 500 units
Max. use per day 600 units
Min. use per day 100 units
Lead time 5 days
variable cost of placing one order $ 36
variable carrying cost per unit per year $ 1
Required:
a) Economic Order Quantity
b) Safety Stock
c) Order Point
Reply
JAIVING G. WISKI on June 30, 2021 at 10:47 am
sorry may you help me that question;
1. An item has a monthly demand of 2500 units and each item

costs $ 10.00 to purchase it. the cost of placing order per unit
is $ 10.00 while holding cost are estimated to be 2% of the
stock value. if the organization works for 10 months in a year.
calculate the followings
(a) Economic Order Quantity
(b) number of orders costs
(c) total ordering cost
(d) average inventory level
(c) the re-order point if lead time 5 days
Reply
Banda Edward on June 4, 2021 at 12:34 am
Can anybody help with solutions to the following questions?
Problem 1:
A large firm uses an average of 40 boxes of copier paper a

day. The firm operates 260 days per year. Storage and
handling costs for the paper are $30 a year per box, and it
costs approximately $60 to order and receive a shipment of
paper.
a) What order size would minimize the sum of annual

ordering and carrying cost?
b) Compute the total annual cost using your order size from
part a.
c) The office manager is currently using an order size of 200

boxes. The partners of the firm expect the office to be
managed ‘in a cost-efficient manner’. Would you recommend
that the office manager use the optimal order size instead of
200 boxes?
Problem 2:
A jewelry firm buys semiprecious stones to make bracelets

and rings. The supplier quotes a price of $8 per stone for
quantities of 600 stones or more, $9 per stone form orders of
400 to 599 stones, and $10 per stone for lesser quantities.
The jewelry firm operates 200 days per year. Usage rate is 25
stones per day and ordering costs are $48.
a) If carrying costs are $2 per year for each stone, find the
order quantity that will minimize total annual cost.
b) If annual carrying costs are 30 percent of unit cost, what is

the optimal order size?
c) If lead time is six working days, at what point should the

company reorder?
Reply
Erick on June 26, 2021 at 8:26 pm
A. Eoq is 490
B. 421
Reply
NATALU on May 14, 2021 at 4:22 pm
An assistant manager is reviewing the costs associated with

one of the store’s better-selling products. The data available
follows.
Demand = 400 units/year
Order cost = K25/order
Holding cost = 50n/unit/year
a) They currently order a one-year supply. What are the total

annual ordering cost and holding cost for this order size? (7
Marks)
b) What would be the EOQ and its associated ordering and

holding costs?
Reply
NATALU on May 14, 2021 at 4:20 pm
As an inventory manager, you must decide on the order

quantity for an item. Its annual demand is 1,000 units.
Ordering costs are K50 each time an order is placed, and the
holding cost is 25 percent of the per-unit price. Your supplier
provided the following price schedule.
Quantity
Price per Unit
1–199
K10.00
200–499
K 9.80
500 or more
K 9.60
What ordering-quantity policy do you recommend?
Reply
marielmacoto on May 12, 2021 at 11:18 am
Out Camping is a manufacturer of supplies and has several

divisions, one of which is the tent division that produces the
deluxe tent Away From Home. Fourteen thousand of these
tents are made each year. This model of tent incorporates two
zipping doors in each model. Zippers for these doors are
purchased from Zippy Zippers. Out Camping began this year
with 500 zippers in inventory, but is now adopting an
economic order quantity approach to inventory. A review of
last year’s records reveals the following information
concerning each order placed with Zippy Zippers: variable
labor— $12; variable supplies—$1; fixed computer costs—
$4; fixed office expenses—$2; fixed mailing expenses— $2;
and fixed supplies—$1. No differences are expected this year.
Last year, the cost of carrying one zipper in inventory for the
entire year was $1, but Out Camping has recently negotiated a
new lease on its warehouse, and the cost of carrying each
zipper is now expected to increase by 25 cents. Out Camping
also found that it took 7 days from the time an order was sent
to Zippy until the zippers were received.
Required: Show your solutions in a detailed format.
a. Compute economic order quantity.
b. Compute reorder point. Presume Out Camping has a desire

to reduce its ending inventory to one-half of this year’s
beginning amount and that the company produces the Away
From Home model 140 days each year.
Reply
Wilson mdalingwa on May 11, 2021 at 5:41 pm
Hello.
I need help to answer this question
A certain item cost $235 per ton. The monthly requirements

are 5 tons and each time the stock is $1000. The cost of
carrying inventory has been estimated at 10% of the value of
the stock per year.
(a) what is the optimal total cost.
(b) what is optimal order quantity
(c) Determine the optimal time between two orders
(d) what is the optimal number of orders
Reply
Zahid Alam on May 3, 2021 at 4:24 pm
Help me Solve it please
Dell computer stocks and sells laptops. Each time to places an

order it costs the store $645 with the manufacturer for
laptops. In the current year, the company has ordered laptops
for the three times. Per month, carrying cost of the laptops in
inventory is $13. Estimated annual demand for the laptops
will be XYZ units. Determine the total minimum inventory
cost, Number of orders per year and length of order cycle.
Reply
aima shahreena on April 17, 2021 at 4:25 pm
I NEED THE ANSWER ASAP PLEASE HELP!
a manufacturing company uses 40000 kilograms of a raw

material evenly over a period. the material is purchased at
rm2.50 per kilogram. the cost of placing an order is rm120
and the cost of holding 1 kilogram of inventory for the period
is 15% of the purchase cost.
a)calculate the economic order quantify (eoq)
b)calculate the total holding of the raw material in the period if

the order quantity is 6,000 kilograms and the buffer inventory
is 2,000 kilograms.
Reply
Mateus F Lima on April 23, 2021 at 1:44 pm
Just consider that the raw materials in kg are units (it could
make it easier for you to translate to the inventory
formulas).
a) The EOW is sqrt[(2x40000x120)/(0.15×2.5)] ~ 5060
b) The total holding cost is the sum of the normal holding

cost with the buffer (safety stock).
normal holding cost = (6000/2)x0.375 = 1125
Safety stock (buffer ) = 2000×0.375 = 750
Total holding cost = 1125 + 750 = 1875
Reply
Marshal on March 26, 2021 at 8:26 pm
Please I need an urgent help with the following problem:
The demand for an item is 44,000 units per annum, the

ordering cost is $50 per order. The holding cost per item is
$2.5 per annum and the price per unit of the item is $10. The
supplier offers a discount rate of 3% for orders between

10,000 to 31,999 and 8% discount rate for orders of 32,000
and above.
You’re required to determine the best quantity to order
Reply
pj on March 15, 2021 at 12:04 am
ABC Corp. currently places orders for a particular stock item

at quarterly intervals. Information concerning this items is as
follows: P10 Cost of placing an order 25,000 units Annual
demand P0.50 Carrying cost per unit What annual cost saving
would result if ABC used the economic order quantity for
order sizes instead of their current policy?
Reply
asher on January 24, 2021 at 6:54 pm
2) The Star Equipment Company purchases 54,000 bearing

assemblies each year at a unit cost of $40.00. The holding
cost is $9.00 per unit per year, and the ordering cost is
$20.00.
(a) What is the economic order quantity?
(b) How many orders should be placed per year?
(c) If the lead time is one (01) month, what is the re-order
point for the assemblies?
Reply
G J on January 31, 2021 at 9:48 am
(a) 490
(b) 110
(c) 4500
Reply
rr on April 6, 2021 at 10:42 am
A company requires 1000 units of raw material per

month. Ordering cost is Rs 150 per order. Carrying
cost in addition to Rs. 3 per unit is estimated to be 20%
of average inventory per year. Cost of raw material is
Rs. 10 per unit. Find EOQ, the number of orders in a
year, and the total Inventory cost.
Need help with this prblm!
Reply
Dahir on April 23, 2021 at 2:10 am
A firm has $ 4 per year carrying cost on each unit of

inventory and annual usage of 50,000 units. Ordering cost
is $ 100 per order. Calculate economic ordering quantity,
total cost of inventory, annual ordering cost and annual
carrying cost?
I need how to solve this question
Reply
joanncarlino on November 7, 2020 at 1:23 pm
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website. Keep up the great writing.
King regards,
Balle Zacho
Reply
Mure on November 1, 2020 at 1:13 pm
Thanks man. Very useful.
Reply
Blet on May 2, 2020 at 12:16 pm
hardware shop in Gweru sells 2500 brackets in a year and the

sales is relatively constant throughout the
year. These brackets are purchased from a supplier from

Harare for $15 each, and lead time is two days.
The holding cost per bracket per year is $1.5(or 10% of the
unit cost) and the ordering cost per order is
$18. 75. There are 250 working days per year.
1. What is the EOQ?
2. Given the EOQ, what is the aver
Reply
Simba on February 27, 2021 at 2:30 pm
EOQ = 250 Brackets
TOTAL COST = $ 375
Reply
issa lingwanda on January 27, 2020 at 2:12 pm
I pass through the notice i understand
Reply
Zaheer Swati on January 28, 2020 at 4:44 pm
Thank you
Reply
Sandhya Bunghoo on February 7, 2020 at 5:05 pm
I need help on a Question Sir
Reply
Ngwa Fuhnwi on January 28, 2021 at 5:39 am
Is it possible for you to place an order and the delivery is

done in parts? If yes how do we calculate the EOQ.
Reply
By kash on April 9, 2021 at 5:25 am
Precision Engineering Factory consumes 50,000 units

of a component per year. The ordering, receiving and
handling costs are Rs 3 per order while the trucking
costs are Rs 12 per order. Further details are as
follows: deterioration and obsolescence cost Rs 0.004
per unit per year; interest cost Re 0.06 per unit per
year; storage cost Rs 1,000 per year for 50,000 units.
Calculate the economic order quality
Reply
Suyog Jawade on August 3, 2021 at 5:55 am
A shopkeeper has a uniform demand of an item at the rate

of 100 items per month. He buys it from a supplier at a
cost of 12/item and the cost of ordering is 10/order. If the
stock holding cost is 20% of average stock value, how
frequently should he replenish his stocks ?
Further, suppose the supplier offers a 5% discount on

orders between 200 and 999 items and a 10% discount on
orders exceeding or equal to 1,000, can the shopkeeper
reduce his cost by taking advantage of either of these
discounts ?
Reply
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3/31/22, 11:14 PM Economic Order Quantity - Examples - Formula - Questions

Previous Lesson: Inventory Management

Next Lesson: Cost Volume Profit Analysis

Video Lecture: Costing Concepts

Click Here T o Download Workbook Used in Video

Lecture 6 (Part 2): Economic Or…

Click Here T o Download Workbook Used in Video

Economic Order Quantity is the level of inventory that minimizes

oldest classical production scheduling models. Economic order

quantity refers to that number (quantity) ordered in a single purchase

so that the accumulated costs of ordering and carrying costs are at

the minimum level. In other words, the quantity that is ordered at

as well as interest on the capital invested.

The economic order quantity can be determined by the following

EOQ = Economic Order Quantity,

RU = Annual Required Units,

OC = Ordering Cost for one Unit

UC = Inventory Unit Cost,

CC = Carrying Cost as %age of Unit Cost

>> Practice Economic Order Quantity Problems and

Best Buy incurs a fixed order placement, transportation, and

Evaluate the number of computers that the store manager should

order in each replenishment lot?

>> Practice Economic Order Quantity Problems and

various components and is planning its orders. The Annual

consumption is 80,000 units, Cost to place one order is Rs. 1,200,

Total Cost of Inventory.

>> Question and Answers: Economic Order Quantity

Problems and Solutions

two alternate Order Plans for its inventory of a certain item.

Irrespective of the plan to be followed, demand for the item is

lowest total inventory cost?

>> Practice Economic Order Quantity Problems and

maximum consumption of 100 units per working day). It costs Rs.

20 to place and receive an order. The shop orders in lots of 400

units. It cost Rs. 4 to carry one unit per year of inventory.

(1) Calculate total annual ordering cost

(2) Calculate total annual carrying cost

(3) Calculate total annual inventory cost

(4) Calculate the Economic Order Quantity

(6) How much save using EOQ

(7) Compute ordering point assuming the lead time is 3 days

>> Practice Economic Order Quantity Problems and

Previous Lesson: Inventory Management

Next Lesson: Cost Volume Profit Analysis

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Unit priceRO 2,400