EOQ Model

1. The following data relate to inventories for a given year of “Cloud 99”

Economic order quantity 7,500 units

Cost to place one purchase order P 75.00

Total cost to place purchase order for the year P 15,000.00

Cost to carry one unit for one year P 6.00

The estimated annual usage in units would be 2,250,000 units

2. Statement 1: The two main types of inventory cost relevant to inventory decision making are carrying
cost and ordering cost. Statement 2: The optimal ordering quantity in the EOQ model occurs at the point
where the sum of the carrying costs and ordering costs are minimized.

A. Statement 1 and 2 are false

B. Statement 1 and 2 are true

C. Only statement 1 is true

D. Only statement 2 is true

3. “Blue 04” sells 10,000 RTW pants evenly throughout the year. The cost of carrying one unit in
inventory for one year is P6.00 and the purchase cost is P108.00 per order. What is the economic order
quantity? 600

4. The carrying cost pertaining to inventory include:

A. Insurance costs, incoming freight costs and storage costs.

B. Insurance costs, incoming freight costs and setup costs.

C. Setup costs and opportunity cost of capital invested in inventory.

D. Storage costs and opportunity cost of capital invested in inventory.

5. The order size determined by the EOQ formula minimizes the annual inventory cost which is
comprised of ordering cost and _____?

A. Safety stock cost

B. Carrying cost
C. Stock out cost

D. No answer

6. The “Erika 88” uses the economic order quantity (EOQ) model for inventory management. A decrease
in which of the following variable would increase the EOQ?

A. Annual sales

B. Cost per order

C. Safety stock level

D. Carrying costs

7. “Hot & Cup 7” which buys in a pre-sell basis, is discussing with the route salesmen on the proper cases
to be ordered and the frequency of call. From the route book and other records, the following are
available: prior year’s purchases, 50,000 case: carrying cost per case of inventory, P1.20; cost of placing
an order P3.00; weekly demand is approximate 952 cases. Safety stock required is 140 cases. No change
in demand is expected this year. (Use a 365-day, 52-week year). Determine the economic order
quantity.

8. One of the products “Flash and Dash 5” sells is a magnetic back support. The ordering cost related to
this product is P12.50 per order. The cost of carrying one item of inventory for one year is P16.00. The
business sells 40,000 of this type of product evenly throughout the year. How much is the total ordering
costs per year? 2,000.00

9. How much is the total carrying costs per year at the economic order quantity? 2,000.00

10. JO Inc., currently places order for particular stock item at quarterly intervals. Information concerning
these items is as follows:

Cost of placing an order P10.00

Annual demand 20,000 units

Purchase price per unit P1.00

Carrying cost rate 10%

Economic order quantity is? 2000

11. The purpose of the EOQ Model is to

A. Minimize the safety stock.

B. Minimize the sum of the order costs and the holding costs.

C. Minimize the inventory quantities.

D. Minimize the sum of the demand costs and the backlog costs.